the titan corporation securities litigation 04-cv-676-consolidated complaint for violation of the
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3:04-cv-00676-
6
-NLS Document 17 Filed 09// 7/2004
ORIGINAL
LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
REED R. KATHREIN (139304)STANLEY S. MALLISON (184191)JAMES W. OLIVER (215362)100 Pine Street, Suite 2600San Francisco, CA 94111Telephone: 415/288-4545415/288-4534 (fax)
- and -BRIAN O. O'MARA (229737)401 B Street, Suite 1700San Diego, CA 92101Telephone: 619/231-1058619/231-7423 (fax)
ROBBINS UMEDA & FINK, LLPBRIAN J. ROBBINS (190264)MARC M. UMEDA (197847)JEFFREY P. FINK (199291)1010 Second Avenue, Suite 2360San Diego, CA 92101Telephone: 619/525-3990619/525-3991 (fax)
Co-Lead Counsel for Plaintiffs
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04 SEP 17 Pil 4: 02
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
In re TITAN, INC. SECURITIESLITIGATION
E This Document Relates To:
ALL ACTIONS.
D
Master File No. 04-CV-0676-LAB(NLS)}} (Consolidated with 04-CV-0701-K(NLS))
CLASS ACTION
CONSOLIDATED COMPLAINT FOR} VIOLATION OF THE FEDERAL
SECURITIES LAWS
DEMAND FOR JURY TRIAL
^R-
asi 3:04-cv-00676-6-NLS
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Document 17 Filed 09/2004 Page 3 of 87r]
TABLE OF CONTENTS
Page
I. SUMMARY OF THE FRAUD .................................................................:............... ..........I
II. JURISDICTION AND VENUE ................................................................................ ..........6
III. THE PARTIES ........................................................................................................... ..........6
IV_ BACKGROUND TO THE CLASS PERIOD ........................................................... ..........9
A. General ........................................................................................................... .......... 9
B. The FCPA and DOJ Guidance ....................................................................... ..........9
1. General Background .......................................................................... ..........9
2. Antibnbery Provisions of the FCPA .................................................. ........11
3. Sanctions for Violating the Bribery Provisions of the FCPA ............ ........13
C. Defendants' Knowledge of the FCPA and Statements to theInvestment Community About Compliance .................................................. ........14
D. Defendants Knowingly Violated the FCPA, Titan's Code of Ethics andGAAP ........................................................................................... ............. ........19
1. Titan Made Millions of Dollars in Bribes and ImproperlyAccounted for Overseas Payments .................................................... ........19
2. Titan Wireless Business Unit - Benin, Africa ................................... ........21
a. Improper and Illegal Payments .............................................. ........22
b. Inflated Revenue and Accounts Receivables ......................... ........23
3. Titan Secure - Saudi Arabia and FAA Contract ........................................26
a. Titan Secure's Operations and National I.D. CardProject in Saudi Arabia .......................................................... ........27
(1) The Saudi Ministry of Interior Was Gifteda $5 Million Supercomputer ....................................... .......27
(2) Titan Hired a Private Consulting CompanyOwned by the Saudi Minister of the Interiorto Get Awarded the Project ................................................28
(3) Titan Improperly Recognized Revenue forTitan Secure in Saudi Arabia and Failed to TimelyWrite-Down the Value of the Associated Assets ...............29
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b. Titan Secure Inappropriately Recognized Revenue andFailed to Reserve for Uncollectible Accounts Receivableand Write-Down Impaired Assets of Its FAA Contract ................ .30
4. Datron World Communications Division - Far East/Asia ....................... .31
a. Improper and Illegal Payments ..................................... .......... .31
b. Improper Recognition of Revenue ................................................ .32
E. Alive Pre-Class Period Statements Made False and/or Misleading byDefendants' Conduct ............................................................................................ .33
V. DEFENDANTS' FRAUDULENT SCHEME AND COURSE OF CONDUCT ............. .36
A. Defendants Position Titan for Acquisition ........................................................... .36
B. Defendants Issue False Financials and Guidance and OmitViolations of the FCPA and GAAP ...................................................................... .38
C. Defendants Negotiate a Merger with Lockheed ....................................................39
D. Defendants Announced the Merger Agreement with LockheedWithout Disclosing the FCPA and GAAP Violations .......................................... .44
E. Titan Continues to Issue False Financials and Omits Impactof Violations of the FCPA and GAAP ...................................................................44
F. Titan Reveals Investigations Into Possible Violations of the FCPA -ButDenies the Veracity of the Allegations ................................................................. .46
G. Titan's 2003 Form 10-K Contained Numerous False andMisleading Statements ........................................................................................... 48
H. Titan Issues Further False or Misleading Financials for 1Q04and Omits Impact of Violations of the FCPA and GAAP ..................................... 52
1. The Merger Crumbles as Titan Fails to Resolve the Investigations ...................... 53
J. Post-Class Period Revelations About Titan ........................................................... 57
K. Basis that Statements Were False or Contained Material Omissions .................... 61
L. Defendants' Conduct Violated GAAP and SEC Rules and Regulations ............... 61
1. Inadequate Disclosure in Titan's SEC Filings ........................................... 61
a. Inadequate Disclosure in Titan's Management's Discussionand Analysis Section of the Form 10-K ......................................... 62
b. Inadequate Footnote Disclosure ..................................................... 62
2. Titan's Bribes and Resulting Revenue Were Material .............................. 63
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1 3. Titan Inappropriately Inflated Revenue and Accounts Receivables .......... 63
2 4. Defendants Failed to Write-Off Impaired Assets ...................................... 65
3 5, Vendor Consideration (Including Bribes) .................................................. 65
4 VI. SCIENTER ........................................................................................................................ 66
5 A. Motive Caused by the Need for Cash if Titan Were to Continueto Grow by Acquisition .......................................................................................... 66
6B. Facts Regarding Each of the Individual Defendants Support
7 a Strong Inference of Scienter ............................................................................... 67
8 1. Gene Ray.................................................................................................... 67
9 2. Mark Sapp .................................................................................................. 71
10 3. Deanna Horn Lund (Petersen) .................................................................... 72
11 4. Eric DeMarco .......................... 73
12 C. Admission of Scienter by Titan Director ............................................................... 75
13 VII. CLASS ACTION ALLEGATIONS.... ................................................................. ............ 76
14 COUNT I ....................................................................................................................................... 77
15 COUNT II ..................................................................................................................................... 78
16 VIII. VIII. PRAYER FOR RELIEF ............................................................................................ 78
17 IX. JURY DEMAND .............................................................................................................. 79
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I. SUMMARY OF THE FRAUD
i . This is a securities fraud class action arising out ofdefendants' scheme and wrongful
course ofbusiness, which involved defendants' use of bribes and illegal payments to win contracts
with foreign governments, and ultimately generate revenue and profits. This action is being brought
by the lead plaintiff on behalf of investors who purchased the common stock of The Titan
Corporation ("Titan" or the "Company") at artificially inflated prices between July 24, 2003 and
June 25, 2004, inclusive (the "Class Period"). Defendants are Titan and certain of the Company's
key officers and directors.
2. Titan is a technology developer and systems integrator for the Department ofDefense
(the "DOD"), the Department of Homeland Security, and intelligence and other key government
agencies. The Company was founded in 1981 by its current Chairman and Chief Executive Officer
("CEO"), Gene Ray. The Company provides a range of services and systems solutions that include
research and development, design, installation, integration, tests, logistics support, maintenance and
training. Titan also provides services and solutions to government agencies with sophisticated
I information systems.
3. By the beginning of the Class Period on July 24, 2003, Titan was achieving record
earnings by engaging in illegal and/or impermissible practices by secretly paying kickbacks in the
form of "consulting fees" to foreign government officials in connection with Titan's sale of hand-
held radios and related products to foreign governments. As the defendants were announcing record
revenue and earnings growth during the Class Period, portions of which were derived by sales
obtained through these illegal means, defendants knew or were reckless in not knowing that their
illegal practices would be discovered and that Titan would be penalized.
4. The Class Period begins with defendants' July 24, 2003 announcement that Titan's
2Q03 revenues had risen 27% compared to its 2Q02 revenues and Titan's increased FY03 and FY04
expectations. This announcement caused the Company's stock to surge 28% in a single trading
session, from $11 to $16 per share. As a result of defendants' false statements and wrongful
conduct, Titan stock traded at artificially inflated prices throughout the Class Period.
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5. With the Company' s common stock price inflated and wanting to sell Titan to "cover
their tracks in the sand," on September 15, 2003, defendants announced that the Lockheed Martin
Corporation ("Lockheed") would acquire the outstanding shares of Titan. Lockheed would pay
consideration valued at $22 per share, comprised of a mix of cash and Lockheed stock. In
connection with the negotiation of this merger, defendants caused Titan to agree to pay them
millions ofdollars in separation benefits, premature vesting of stock options, retention bonuses and
I extra bonuses for arranging the merger. The September 15, 2003 news ofthe proposed acquisition
ofTitan by Lockheed once again caused the Company's stock to spike from $17 to $21 per share on
extremely high volume. Concealment of the illegal payment of the "consulting" fees to foreign
governments was necessary until the merger was complete.
6. On February 13, 2004, defendants disclosed that Lockheed was delaying
consummation of the acquisition until it could investigate possible payments made by Titan to
foreign officials through consultants. It was also revealed that the Securities and Exchange
Commission (the "SEC") and the U.S. Department ofJustice (the "DOT') had begun an inquiry into
the illegality of the payments and Titan's disclosure of the payment. On this news, the price of
Titan's common stock declined sharply from a February 12 close of$21.80 to a February 13 close of
$20.49 on heavy volume ofover 8.5 million shares. Defendants tried to obfuscate the impact of the
news in an ongoing effort to keep Titan's stock price up so they could complete the merger and
issued a statement indicating that they had investigated the transactions in connection with
Lockheed's due diligence and affirmatively falsely denied any wrongdoing, stating that "[n]either
I Lockheed nor us havefound anything wrong."
7. On March 5, 2004, it was disclosed that the DOJ had opened a formal criminal
investigation into whether illegal payments were made by Titan in violation of the Foreign Corrupt
Practices Act of 1977, 15 U.S.C. §§78dd-1, et seq. ("FCPA"). Lockheed told The Wall Street
Journal that the allegations of illegal payments , if true, could constitute violations of the FCPA.
Both companies indicated that delays occasioned by their own internal investigations - including
investigations into whether Titan properly accounted for the payments in its financial statements -
the SEC investigation and now the DOJ's formal criminal investigation would likely prevent the
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merger from closing prior to the March 31, 2004, so-called "walkaway" termination date at which
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11 point either party not then in breach could terminate the merger.
8. Then, on March 22, 2004, The Wall Street Journal published an investigative news
report entitled "Titan Foreign Payments Scrutinized --- An Internal Look Uncovers Millions of
Dollars in Deals in Africa, Mideast and Asia." This report revealed that despite defendants' public
statements to the contrary, Titan's internal investigations had confirmed widespread illegal payments
of cash and goods made by Titan through consultants to foreign officials in a number of countries
around the globe. The report also revealed that Titan was negotiating a plea agreement with the
DOJ, stating in relevant part that:
Internal investigators for Lockheed Martin Corp. and Titan Corp. havefound Titan madepotentially improperpayments while competingfor business inAfrica, the Middle East and Asia, according to a person familiar with theinvestigation.
The investigation -- which is unfolding amid Lockheed Martin's pending$1.8 billion acquisition of Titan -- has uncovered millions ofdollars ofsuspiciousoverseas payments, some as recently as 2003, according to this person. It hasalready prompted the suspension of a midlevel employee and implicated a topmarketing officialfor one of Titan's units , this person said.
With lawyers for the two companies continuing to pursue allegations ofimproper payments on behalf ofTitan to middlemen in countries ranging from SaudiArabia to Bangladesh to the Philippines to parts of West Africa, the probe couldexpand to focus on higher-level Titan executives , this person said.
Talks with Justice Departmentprosecutors about apossible corporatepleaagreement are slatedfar this week, according to the person familiar with the internalinvestigation. The government's investigation ofcurrent and former Titan officials isslated to stretch out substantially longer. Titan also hopes to settle a separate civilinvestigation by the Securities and Exchange Commission.
Titan has maintained there isn't evidence of bribes or other illegal acts.But the San Diego company recently set aside $3 million in reserves -- therebylowering its earnings estimate for 2004 -- to cover potential government fines.
Lockheed Martin, however, appears eager to avoid being tarred with Titan'smissteps. For the transaction to close, Lockheed Martin officials have privatelysuggested Titan mustget outfrom under the threat offederal indictment, accordingto people familiar with the situation.
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9, On these revelations, Titan's stock fell once again to close at $19.73 per share on
March 22, 2004 on heavy volume,
10. The impact of defendants' wrongdoings continued. On April 7, 2004, Lockheed
announced that it was reducing its offer to purchase Titan from $22 per share to $20 per share, thus
costing shareholders $200 million.
11. While Titan's shareholders approved the revised terms ofthe merger on June 7, 2004,
Titan was unable to resolve the investigation with the DOJ. Rather, on June 4, 2004, Titan received
a "Wells Notice" from the SEC notifying Titan that the SEC staff intended to recommend action
against Titan for violation of U.S. securities laws. Thus, on June 26, 2004, Lockheed notified Titan
that it was terminating the merger agreement, sending Titan's stock plummeting as low as $11.74 per
share on July 2, 2004.
12. Since then, Titan has written-down or taken loss allowances relating to these African,
Middle Eastern and Asian operations where the illegal acts took place. For the 2Q04 ending June
130, 2004:
(a) Titan recorded an aggregate after-tax loss of $11.4 million pertaining to its
long discontinued Titan Wireless, Inc. ("Titan Wireless") activities in Benin, Africa including a full
allowance for the $14.351 million remaining on a receivable for the Benin contract, and $2.3 million
(after-tax) relating to a contingent liability with a subcontractor on the project;
(b) Titan took approximately $ 10 million in charges pertaining , in part, to
impairment of two large computer systems in Saudi Arabia, and, in part to termination ofa program
by an undisclosed "civilian government agency" (most likely the Federal Aviation Administration
("FAA"));
(c) Titan recognized approximately $5 million in losses resulting from its contract
in Saudi Arabia for a National Identification Card Project ("National I.D. Card Project"); and
(d) Titan recorded an after-tax loss of $24.6 million related, in part, to
discontinued operations of its Datron World Communications ("Datron") division in Asia, mostly to
"goodwill" and "fixed asset values not expected to be recovered."
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13. Most recently, Titan has admitted that it has set aside a reserve of almost $30 million
for resolution of the government's FCPA investigations - one ofthe biggest FCPA penalties ever.
Also, according to The Wall Street Journal, the DOJ was demanding that Titan plead guilty to
I multiple felony counts.
14. Defendants' misconduct throughout the Class Period was designed to perpetuate the
perception of Titan as a company that was poised for continued growth and whose stock would soon
be acquired by Lockheed at a substantial premium to its pre-merger announcement trading price.
The statements made by defendants during the Class Period were each false and misleading when
made. The true facts, known only to defendants, were that by means of defendants' undisclosed,
improper and illicit practices set forth in §W.D, Titan and defendants:
(a) Inappropriately inflated revenue and accounts receivables, and failed to timely
write-off assets, in violation of GAAP (see §V.L.);
(b) Violated the FCPA, in violation of 15 U.S.C. §§78dd-1, et seq., and Titan's
own publicly stated Code of Ethics ostensibly designed to assure the investment community that
Titan would not violate these laws;
(c) Made Titan's financial results look better than they actually were prior to and
during the Class Period;
(d) Exposed Titan to huge civil and criminal penalties for its unlawful conduct,
the potential liability of which was not adequately reserved for or disclosed in the Company's
audited financial statements;
(e) Successfully negotiated a merger with Lockheed on favorable terms and kept
Lockheed bound to the merger contract through the end of the Class Period; and
(i) Falsely denied any illegal or wrongful conduct.
15. The following chart graphically demonstrates the effect of Titan's statements on the
market, and the impact of the hidden violations of the FCPA once their potential existence was
I disclosed:
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$24
$20
L
a $18
$12
S8
Titan Corp.Dally Mere Pricing ; Jun. 6, 2003 M September 3, 2004
2A301! Tan uuwunceSE C inre^gHnn n2oFCPArioMisn . 3W: Lnc1 head
mnounps mxgen n1^Ra in r¢n of
:
otaww gie ndr .
aenin^grnhe meryerwiU be.pr minepd./
/ 60000Tien/ enrtourraae
no
nalulon 10in uoi oiions
4,7004 hY rq a@F arm ndrdto i20 per Share and 625434: Lockheedmquirernaniiho anngwuet W r kh- knirneasigatunsbe of merger.nmf+.d by SI25
9115.OiTtm ennounmemerger wi:h LoddreedMrM 1 922 per ehaee.
?NM Tien wounctirrrmuen up2T%andincn 00as g udunce for2003 end ZQI^.
Class Period: 7/24103 - 6!25104
0006/2003 08114P2003 10122!3003 i2r3112003 02111!2004 05/1812004 07120)20040711112003 0911812003 11125/2003 0210512004 041150604 0&.4/2004 0810112004
H. JURISDICTION AND VENUE
16. Jurisdiction is conferred by §27 of the Securities Exchange Act of 1934 ("1934 Act").
The claims asserted herein arise under §§10(b) and 20(a) of the 1934 Act and Rule 10b-5
promulgated thereunder.
17. Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the false
and misleading statements were made in or issued from this District.
18. The Company's operational headquarters are in San Diego, California where the day-
to-day operations of the Company are directed and managed.
III. THE PARTIES
19. Lead Plaintiff Israel Shurkin purchased Titan common stock during the Class Period
and was damaged thereby. This Court entered an order designating Mr. Shurkin lead plaintiff on
July 12, 2004.
20. Titan is a technology developer and systems integrator for the DOD, the Department
of Homeland Security and intelligence and other key government agencies. Titan is headquartered
in San Diego, California and has 81.5 million shares of common stock traded on the NYSE.
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21. Defendant Gene W. Ray, Ph.D. was a co-founder ofTitan Systems , Inc., the parent of
which merged into The Titan Corporation in 1985. He served as a Director, CEO and President of
Titan Systems from its inception in 1981 until the merger in 1985. He has been Chairman of the
Board of Directors since May 1999 and CEO since the merger. Ray also served as President until
May 2002 and was re-elected as President on February 2003. As a consequence of Ray's controlling
position within Titan, Ray has signed each of Titan's Annual Reports on Form 10-K filed with the
SEC. Ray was Chairman ofthe Board of Titan Wireless and Titan Africa, Inc. ("Titan Africa") and
signed the Registration Statement filed on Form S-4 with the SEC on July 9, 2003 on behalf of
Titan, Titan Wireless and Titan Africa.
22. Defendant Mark W. Sopp has been Titan's Senior Vice President, Chief Financial
Officer ("CFO") and Treasurer since April 2001. Prior to that Sopp was a Vice President and CFO
ofTitan Systems Corporation ("Titan Systems"), a subsidiary, since 1998. Sapp has signed each of
Titan's annual and quarterly reports on Form 10-K and 10-Q filed with the SEC since he became
CFO, including Titan's quarterly report for the period ending March 31, 2001 on Form 10-Q, filed
on May 15, 2001. Sopp was Senior Vice President, CFO and Treasurer of Titan Wireless and Titan
Africa and signed the Registration Statement filed on Form S-4 with the SEC on July 9, 2003 on
behalf of Titan, Titan Wireless and Titan Africa.
23. Defendant Eric M. DeMarco served in a variety ofsenior executive positions at Titan
until February 20, 2003, when DeMarco resigned as an officer of Titan. DeMarco had been
President and Chief Operating Officer ("COO") since May 16, 2002, and Executive Vice President
I and COO since April 2001. Prior to that DeMarco was Executive Vice President, CFO and
Treasurer since September 1998, and Senior Vice President and CFO from January 1997 to August
1998. As a consequence of DeMarco ' s controlling position at Titan, DeMarco signed the Annual
Report on Form 10-K for the period ending December 31, 2001 , filed with the SEC on April 1, 2002
and the Form 10-K/A filed with the SEC on June 12 , and August 7, 2001 . DeMarco also signed
each ofTitan's filing with the SEC while he was Titan's CFO, including Titan's Form 10-Q filed on
November 14, 2000, and Titan's Annual Report on Form 10-K405 for the period ending December
^ 31, 2000 filed on April 2, 2001 and the Form 10-K405/A filed with the SEC on April 4, 2001.
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24. Defendant Deanna Lund was Titan's Corporate Controller until April 19 , 2004, when
Titan announced that Lund had left Titan for another position. Prior to working at Titan, Lund
worked with defendant DeMarco at Arthur Andersen LLP's ("Arthur Andersen") San Diego office
and then, in 1993, Lund joined Titan as corporate manager ofoperational analysis. When DeMarco
was hired by Titan in January 1997, Lund was promoted to Corporate Controller. As a consequence
of Lund's controlling position at Titan, Lund signed Titan's Form 10-Qs and Form 10-Ks from
FY00 through year end 2003. Lund now works as the Senior Vice President and CFO of Wireless
Facilities Inc. ("Wireless Facilities") with defendant DeMarco. Ms. Lund has variously referred to
herself throughout her tenure at Titan as Deanna Hom, Deanna Lund, and Deanna Petersen.
25. Beginning with Titan's Amended Annual Report for the period ending December 31,
2001 filed on August 7, 2002, both defendants Ray and Sopp signed and filed with the SEC
certifications pursuant to §906 of the Public Company Accounting Reform and Investor Protection
Act of 2002 (18 U.S.C. §1350 as adopted) ("Sarbanes-Oxley Act"), representing that (a) the
quarterly and annual periodic filings from August 7, 2000 through the end ofthe Class Period fully
complied with the requirements of §13(a) and §15(d) of the 1934 Act, as amended, and (b) the
information contained therein fairly represented, in all material respects, the financial condition of
the Company at the end of the period covered by the periodic report and results of operations of
Titan for the same period.
26. The individuals named as defendants in ¶121-24 are referred to herein collectively as
the "Individual Defendants." Each defendant is liable for participating in the making of false
statements and/or failing to disclose adverse facts known to him about Titan. The Individual
Defendants, because of their positions with the Company, possessed the power and authority to
control the contents of Titan's statements and presentations to securities analysts. Because of their
positions and access to material non-public information available to them but not to the public, each
of these Individual Defendants knew that the adverse facts specified herein had not been disclosed
to, and were being concealed from, the public and that the positive representations which were being
made were then materially false and misleading.
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IV. BACKGROUND TO THE CLASS PERIOD
A. General
27. Titan provides products and services to governments and businesses around the
I world.
28. Titan was founded in 1981 by defendant Ray. When defense budgets began to
decline in the late 1980s, the Company diversified into commercial markets such as food irradiation
and telecommunications. As those efforts faltered, Titan had net losses in eight ofthe past ten years.
B. The FCPA and DOJ Guidance
1. General Background
29. One way Titan attempted to recover profitability was via sales to foreign
governments. This move subjected Titan to the FCPA. Pursuant to the 1988 Trade Act, the
Attorney General published guidance concerning the DOJ's enforcement policy with respect to
issues related to the FCPA.
30. In general, the FCPA prohibits corrupt payments to foreign officials for the purpose
ofobtaining or keeping business. The DOJ is the chief enforcement agency, with a coordinate role
played by the SEC.
31. As a result of SEC investigations in the mid-1970s, over 400 U.S. companies
admitted making questionable or illegal payments in excess of$300 million to foreign government
officials, politicians , and political parties. The abuses ran the gamut from bribery of high foreign
officials to secure some type of favorable action by a foreign government to so-called facilitating
payments that allegedly were made to ensure that government functionaries discharged certain
ministerial or clerical duties. Congress enacted the FCPA to bring a halt to the bribery of foreign
officials and to restore public confidence in the integrity of the American business system.
32. The FCPA was intended to have, and has had, an enormous impact on the way
American firms do business. Several firms that paid bribes to foreign officials have been the subject
of criminal and civil enforcement actions, resulting in large fines and suspension and debarment
from federal procurement contracting, and their employees and officers have gone to jail. To avoid
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such consequences, many firms have implemented detailed compliance programs intended to
prevent and to detect any improper payments by employees and agents.
33. The antibribery provisions of the FCPA make it unlawful for a U.S. person, and
certain foreign issuers of securities, to make a corrupt payment to a foreign official for the purpose
ofobtaining or retaining business for, or with, or directing business to, any person. Since 1998, the
FCPA' s provisions also apply to foreign firms and persons who take any act in furtherance of such a
corrupt payment while in the United States.
34. The FCPA also requires companies whose securities are listed in the United States to
meet its accounting provisions, so as to
(A) make and keep books, records, and accounts, which, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of theissuer; and
(B) devise and maintain a system of internal accounting controls sufficient toprovide reasonable assurances that --
(i) transactions are executed in accordance with management's general orspecific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation offinancial statements in conformity with generally accepted accounting principles orany other criteria applicable to such statements, and (II) to maintain accountabilityfor assets;
(iii) access to assets is permitted only in accordance with management'sgeneral or specific authorization; and
(iv) the recorded accountability for assets is compared with the existingassets at reasonable intervals and appropriate action is taken with respect to anydifferences.
15 U.S.C. §78m(b)(2).
35. These accounting provisions, which were designed to operate in tandem with the
antibribery provisions ofthe FCPA, require corporations covered by the provisions to make and keep
books and records that accurately and fairly reflect the transactions of the corporation and to devise
and maintain an adequate system of internal accounting controls.
36. Enforcement . The DOJ is responsible for all criminal enforcement and for civil
enforcement ofthe antibriberyprovisions with respect to domestic concerns and foreign companies
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I and nationals . The SEC is responsible for civil enforcement of the antibribery provisions with I
respect to issuers.
2. Antibribery Provisions of the FCPA
37. Basic Prohibition . The FCPA makes it unlawful to bribe foreign government
officials to obtain or retain business . With respect to the basic prohibition, there are five elements
which must be met to constitute a violation of the FCPA:
(a) The FCPA applies to any individual, firm, officer, director, employee, or
agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be
penalized ifthey order, authorize, or assist someone else in violating the antibribery provisions or if
they conspire to violate those provisions. A foreign company or person is subject to the FCPA if it
causes, directly or through agents, an act in furtherance of the corrupt payment to take place within
the territory of the United States. There is, however, no requirement that such act make use of the
U.S. mails or other means or instrumentalities ofinterstate commerce. US. parent corporations may
be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled the
activity in question, as can U.S. citizens or residents, themselves "domestic concerns," who were
employed by or acting on behalf of such foreign-incorporated subsidiaries.
(b) The person making or authorizing the payment must have a corrupt intent, and
the payment must be intended to induce the recipient to misuse his official position to direct business
wrongfully to the payer or to any other person. The FCPA does not require that a corrupt act
succeed in its purpose. The offer or promise of a corrupt payment can constitute a violation of the
statute . The FCPA prohibits any corrupt payment intended to influence any act or decision of a
foreign official in his or her official capacity, to induce the official to do or omit to do any act in
violation ofhis or her lawful duty, to obtain any improper advantage, or to induce a foreign official
to use his or her influence improperly to affect or influence any act or decision.
(c) The FCPA prohibits paying, offering, promising to pay (or authorizing to pay
or offer) money or anything of value.
(d) The prohibition extends only to corrupt payments to a foreign official, a
foreign political party or party official, or any candidate for foreign political office. A "foreign
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official" means any officer or employee ofa foreign government, apublic international organization,
or any department or agency thereof, or any person acting in an official capacity. The FCPA applies
to payments to any public official, regardless of rank or position.
(e) The FCPA prohibits payments made in order to assist the firm in obtaining or
retaining business for or with, or directing business to, any person. The DOJ interprets "obtaining or
retaining business" broadly, such that the term encompasses more than the mere award or renewal of
a contract. The business to be obtained or retained does not need to be with a foreign government or
foreign government instrumentality.
38. Third Party Payments . The FCPA prohibits corrupt payments through
intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion
of the payment will go directly or indirectly to a foreign official. The term "knowing" includes
conscious disregard and deliberate ignorance. The elements ofan offense are essentially the same as
described above, except that in this case the "recipient" is the intermediary who is making the
payment to the requisite "foreign official."
39. Intermediaries may include joint venture partners or agents. To avoid being held
liable for corrupt third party payments, U.S. companies must exercise due diligence and take all
necessary precautions to ensure that they have formed a business relationship with reputable and
qualified partners and representatives . Such due diligence may include investigating potential
foreign representatives and joint venture partners to determine if they are in fact qualified for the
position , whether they have personal or professional ties to the government , the number and
reputation oftheir clientele , and their reputation with the U.S. Embassy or Consulate and with local
bankers , clients, and other business associates . In addition, in negotiating a business relationship, the
U.S. firm should be aware of so-called "red flags," i.e., unusual payment patterns or financial
arrangements , a history ofcorruption in the country, a refusal by the foreign joint venture partner or
representative to provide a certification that it will not take any action in furtherance of an unlawful
offer, promise , or payment to a foreign public official and not take any action that would cause the
U.S. firm to be in violation of the FCPA, including: unusually high commissions , lack of
transparency in expenses and accounting records, apparent lack ofqualifications or resources on
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J the part oft/sejoint venturepartner or representative to perform the services offered, and whether
11 thejoint venture partner or representative has been recommended by an official ofthe potential
11 governmental customer.
3. Sanctions for Violating the Bribery Provisions of the FCPA
40. Criminal. Criminal penalties may be imposed for violations of the FCPA's
antibribery provisions: corporations and other business entities are subject to a fine of up to $2
million; officers, directors, stockholders, employees, and agents are subject to a fine of up to
$100,000 and imprisonment for up to five years. Moreover, under the Alternative Fines Act, these
fines may be actually quite higher - the actual fine may be up to twice the benefit that the defendant
sought to obtain by making the corrupt payment.
41. Civil. The Attorney General or the SEC may bring a civil action for a fine of up to
$10,000 against any firm as well as any officer, director, employee, or agent ofa firm, or stockholder
acting on behalf of the firm, who violates the antibribery provisions. In addition, in an SEC
I enforcement action, the court may impose an additional fine not to exceed the greater of (a) the gross
amount of the pecuniary gain to the defendant as a result of the violation, or (b) a specified dollar
limitation. The specified dollar limitations are based on the egregiousness ofthe violation, ranging
from $5,000 to $100,000 for a natural person and $50,000 to $500,000 for any other person.
42. Injunctions . The Attorney General or the SEC may also bring a civil action to enjoin
11 any act or practice of a firm whenever it appears that the firm (or an officer, director, employee,
{ agent, or stockholder acting on behalf of the firm) is in violation (or about to be) of the antibribery
provisions.
43. Bars from Doing Business with - the Government . Under guidelines issued by the
Office ofManagement and Budget , a person or firm found in violation of the FCPA may be barred
from doing business with the federal government. Indictment alone can lead to suspension of the
right to do business with the U.S. government. The U.S. President has also directed that no
executive agency shall allow any party to participate in any procurement or nonprocurement activity
if any agency has debarred, suspended, or otherwise excluded that party from participation in a
procurement or nonprocurement activity.
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44. Other Government Action. In addition to the above, there are other severe
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11 consequences for violating the FCPA:
(a) A person or firm found guilty ofviolating the FCPA maybe ruled ineligible to
11 receive export licenses;
(b) The SEC may suspend or bar persons from the securities business and impose
11 civil penalties on persons in the securities business for violations of the FCPA;
(c) The Commodity Futures Trading Commission and the Overseas Private
11 Investment Corporation both provide for possible suspension or debarment from agency programs
for violation of the FCPA; and
(d) A payment made to a foreign government official that is unlawful under the
FCPA cannot be deducted under the tax laws as a business expense.
45. Private Causes of Action . Conduct that violates the antibribery provisions of the
FCPA may also give rise to a private cause of action for treble damages under the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), or to actions under other federal or state laws,
For example, an action might be brought under RICO by a competitor who alleges that the bribery
caused the defendant to win a foreign contract.
C. Defendants' Knowledge of the FCPA and Statements to theInvestment Community About Compliance
46. Prior to the Class Period defendants represented to the investment community that
Titan acted with the highest ethical standards and, hence, complied with the FCPA. At an August
12, 2002 investor conference call in which each ofdefendants Ray, Sopp and DeMarco participated
and spoke on behalf of Titan, Ray stated to analysts that:
Turning to a different but important topic, [o]ur new auditors, KPMG, havecompleted their accounting review and signed off on our first and second quarter of`02 financial statements. This morning we filed our June 30th 10-Q. With that filingis a certification ofthe quarterly financial statements that Mark Sopp our CFO, and Ihave signed. At the risk of sounding like I am saying I did not beat my wifeyesterday, I would like to say that corporate integrity or corporate governance hasalways been a priority at Titan. Indicative of that is that of the 11 members of ourboard, only one is insider [sic], me. And in addition to our audit and compositioncommittee, we have a nominating and corporate governance committee all composedof 100% outside directors. Mostly important, it is -- it has been our policy withinTitan to not only adhere to all the laws ofthe U.S. and the countries in which weoperate, but also, to operate Titan with the highest ethical standards . That policy is
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seldom if ever, discussed outwardly but often, through several mechanisms,propagated internally. I have always and still do believe that this mode of operationis in the long-term best interest of our shareholders.
47. Titan also represented in its Proxy Statements filed before the Class Period and most
I recently in the Form DEF 14A filed on April 15, 2003, that defendants had
[a]dopted a written Code of Ethics that applies to our Directors and to all of ouremployees, including our Chief Executive Officer, Chief Financial Officer,Corporate Controller, and all of our other principal executives . Our Code of Ethicswas adopted approximately fifteen years ago, and each Director and executive officeris required to review our Code of Ethics and to certify compliance annually. Therehave not been any waivers of the Code of Ethics relating to any of our executiveofficers or Directors.
The Form DEF 14A directs investors to the website, hq://www.titan.com/about/
governance/ethics/index.html?select=3.1 , to review the Code of Ethics. This webpage contains an
I introduction by defendant Ray stating:
Titan is very proud of its reputation for excellence and commitment toupholding the highest ethical standards....
We all must remember, however, that everything we do is dependent uponeach individual's commitment to quality and the knowledge that no true success isachieved at the expense ofcompromising behavior. As part ofour day-to-day work,we must be continuously aware of our moral responsibilities and obligations to ourmany customers, suppliers, subcontractors, fellow employees, and communities inwhich we do business . We can never take these things for granted.
Many of the qualities we have come to expect in the way of moral andresponsible behavior as an employee and a company are simply principles of goodcommon sense. Current laws and regulations that govern our actions express theseprinciples of common sense into written and prescribed rules of conduct. On theother hand, what may appear to be acceptable conduct or behavior using commonsense principles may sometimes be in direct violation of laws and regulations forcomplex reasons.
This booklet was prepared as an aid in promoting a clearer understanding ofthe scope and content of the many rules and regulations with which we mustcomply.
48. The booklet contains the Code of Ethics and states that:
All employees and Titan will observe the following general codes ofconduct:
• Abide by all laws and regulations ofcountries and communities inwhich we do business, to the maximum extent permissible by UnitedStates law.
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1 • Maintain a high sense of honor and honesty in dealings andcommitments with our customers and suppliers....
2• Comply with the Company ' s Standards of Conduct and follow their
3 spirit and intent.
4 49. The Code of Ethics also contains representations concerning defendants' conduct in
5 Titan ' s accounting and billing practices:
6 Titan managers and supervisors who are involved in, or who affectaccounting and billing activities , need to ensure that their employees are properly
7 trained and follow established company policies and procedures . In addition, thesemanagers and supervisors must, as appropriate to their area and level of
8 responsibility:
9 • Ensure that costs areproperly classified and allocated in compliancewith pertinent government accounting regulations (when contracting
10 with the government ), including:• Cost Accounting Standards.
11 • Cost principles governing cost allowability.• Contract clauses and other provisions governing payments and
12 billings.• Ensure that all billings to customers accurately reflect the actual
13 amount due for the systems or services rendered and are properlyscreened for any unallowable or otherwise non- billable costs or fees.
14 • Ensure that an adequate system ofinternal control is in place andproperly maintained and complied with.
15 • Ensure the integrity of Titan ' s accounting books , records andreports.Comply with all Titan accounting policies and procedures
16 including the company' s established and disclosed cost accountingpractices.
1750. The Code of Ethics also represents that defendants will maintain accurate corporate
18records:
19It is essential to the basic integrity ofTitan to represent accurately , truthfully
20 and completely records normally and customarily maintained by a business concern.Employees have a responsibility to preserve and maintain the integrity of Titan
21 records with due care and diligence . Statements and representations to authorizedrepresentatives of the government , auditors or other authorized outside persons
22 should be treated in the same manner as corporate records.
23 A11 corporate recordsfor which employees are responsible must accuratelyreflect and be afairpresentation ofthe activity they record and reflect the nature
24 andpurpose ofthe activity. Nofalse or inaccurate entries shall be made in Titan'srecords for any reason.
25The term "records" as used here includes , without limitation , the following:
26 time cards or other time-reporting documents , invoices and related billingdocuments , travel and business meeting expense reports, property or asset registers
27 and accounting or other financial records.
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Employees who are authorized to make expenditures on behalf of thecompany must ensure that they maintain complete records and that all transactionsare properly recorded.
All employees are expected to prepare expense reports in a timely, accurateand truthful manner. Only expenses properly incurred and substantiated for Titanbusiness purposes should be submitted for reimbursement.
51. The Code of Ethics represents that Titan and its employees would and did comply
II with the FCPA in matters of international business:
Social customs and laws vary widely among countries. Specific federal lawsand regulations govern the conduct of international business. Occasionally, foreigncustoms and laws may conflict with those ofthe United States. Titan will follow alllaws of the countries in which it does business, to the maximum extent permissibleby United States law. We will not participate in any activity that supportsinternational restrictive trade practices such as international boycotts, or agreementsto refuse to deal with potential or actual customers or suppliers. Where commonpractice accepts a standard of conduct lower than ours, Titan will adhere to its ownstandards of conduct.
Employees involved in international business matters must be aware ofapplicable trade embargos and anti-boycott provisions. In addition, employees mustbefullyfamiliar with and strictly adhere to suchpro visions as the Foreign CorruptPractices Act thatprohibitpayments or gifts toforeign government officialsfor thepurpose of influencing official government acts or assistance in obtainingbusiness.
Export of Titan's products, and disclosure ofthe technology involved in suchproducts are subject to export regulations. It is essential that Titan comply with allexport licensing requirements by obtaining permits and approvals from appropriategovernmental agencies.
If in doubt, Corporate Legal Counsel should be consulted on any ofthe abovematters.
52. Finally, the Code ofEthics represents that defendants would report any violations to
the Code:
Any Titan employee who becomes aware of any matter that involves apotential violation of any provision of this Code and Standards of Conduct has anaffirmative responsibility to report the matter immediately to his or her manager orsupervisor or a member of the Ethics Committee. The procedures for reporting areas follows:
If circumstances permit, advise the person who is suspected ofwrongdoing that he or she is violating Titan policy or procedures andthat corrective action should be taken immediately.
If the situation is not completely or satisfactorily correctedimmediately, the matter should be reported to the employee'ssupervisor for correction; or
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• If it is not practical under the circumstances to report it to theemployee's supervisor, the situation should be addressed to any oneof the following:
• Your segment/division General Manager or a designatedrepresentative.
• Any member of Titan's Ethics Compliance Committee.
• If any employee unintentionally violates Titan's codes or standards,the employee should immediately seek assistance as required fromany of the above-mentioned sources for proper resolution.
Employees who report violations maydo so verbally or in writing. All reportsof violations:
I . Will be treated in confidence. Titan will protect the identity of theperson suspected of wrongdoing to the extent possible unless the violation is provedand results in disciplinary or legal action.
2. Will be properly investigated and corrective action taken if thereported violation appears to be valid.
3. Will result in a response to the reporting employee as to whether thematter will be investigated or dismissed for reason.
It shall be a violation of this Code for any employee to retaliate in any wayagainst any person for reporting in good faith any suspected violation.
It is Titan's policy to encourage reporting of misconduct where it exists.Titan will protect employees who report instances of misconduct against anyretribution, discrimination or other adverse employer/employee-related consequenceswhich the employee may be concerned about in fulfilling his or her reportingresponsibility.
Written reports of violations should be addressed to a member of the EthicsCommittee. Titan also maintains an Ethics Hotline for use in reporting mattersinvolving these Standards of Conduct. Calls to the Ethics Hotline shall remainconfidential.
53. Around 1998-1999, Titan began to engage in overseas ventures and Mike Fowler,
Titan's Vice President of Corporate Contracts who reported directly to Ray, thoroughly briefed Ray
on the FCPA. These briefings included the prohibitions and restrictions on bribes to foreign
I government officials.
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D. Defendants Knowingly Violated the FCPA, Titan's Code of Ethicsand GAAP
54. Despite defendants' knowledge of the FCPA and representations that they would and
did comply with the FCPA, prior to and leading up to the Class Period , defendants either personally
I violated the FCPA or were aware that Titan or its employees violated the FCPA.
1. Titan Made Millions of Dollars in Bribes and ImproperlyAccounted for Overseas Payments
55. According to Don Bauder, in a February 26, 2004 article published in the San Diego
Reader, entitled "Bribe Paradise," in 2003 an anonymous note was sent to the Federal Bureau of
Investigation , the U. S. Attorney's Office, and the San Diego Reader describing bribes made by Titan
to procure foreign contracts to boost Titan's performance. The note stated:
"The Titan Corporation made multiple violations of the foreign corrupt practices actduring the period 1997 to 2001 by making payments directly to an agent of theGovernment of Benin. The payments were used to secure favorable terms forcontract work carried out by the Titan Wireless Division during this period. Revenuefrom this activity fueled [Titan] performance to be the leading price gainer on the[New York Stock Exchange] in 1999.["]
"To conceal these activities , the division was liquidated in 2001. Theremainder of [Titan] is to be acquired by Lockheed Martin."
56. On February 13, 2004, Titan and Lockheed announced that they had initiated
meetings with both the DOJ and SEC to advise them ofan internal review relating to payments made
to international consultants . While Titan spokesman Wil Williams denied that the investigation had
anything to do with Benin or Titan Wireless, as shown below, one month later Titan admitted that
such payments were indeed under investigation.
57. Titan made millions ofdollars ofpotential illegal bribes or "suspect payments" as late
as 2003 that it failed to disclose and improperly accounted for in Africa, the Middle East and Asia.
Andy Pasztor and Jonathan Karp, staff reporters of The Wall Street Journal reported in an article
entitled, "Titan Foreign Payments Scrutinized --- An Internal Look Uncovers Millions of Dollars in
Deals In Africa, Mideast and Asia," published on March 22, 2004, that, based onpersonal interviews
of people familiar with certain internal investigations at Titan:
Internal investigators for Lockheed Martin Corp. and Titan Corp. havefoundTitan made potentially improperpayments while competingfor business in Africa,the Middle East and Asia , according to a person familiar with the investigation.
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1 The investigation... has uncovered millions ofdollars of suspicious overseaspayments, some as recently as 2003, according to this person. It has already
2 prompted the suspension of a midlevel employee and implicated. a top marketingofficial for one of Titan's units, this person said.
3With lawyers for the two companies continuing to pursue allegations of
4 improper payments on behalf of Titan to middlemen in countries ranging fromSaudi Arabia to Bangladesh to the Philippines to parts of West Africa, the probe
5 could expand to focus on higher-level Titan executives, this person said.
6
7 The investigation into the suspicious transactions centers on Titan's use ofmiddlemen and so-calledfacilitators. Sam Dailey, a marketing manager at Datron
8 World Communications Inc., the Titan unit that makes military-radio systems, hasbeen interviewed about payments to such representatives as part of the internal
9 inquiry, according to the person familiar with the details. One of Mr. Dailey'sassociates has been suspended without pay as a result ofthe investigation, according
10 to this person.
11 Mr. Dailey served as regional director for Africa and the Middle East atDatron before it was acquired by Titan in 2001. Reached at his office in Vista,
12 Calif., on Friday, Mr. Dailey referred all questions to a Titan spokesman, whodeclined to comment. The legal teams in charge of the fact-finding efforts for the
13 companies are also believed to be looking into suspect payments that go beyondDatron.
1458. Titan has since admitted that the investigations have involved at least three business
15units of Titan - Datron World Communications division, Titan Wireless, and Titan Secure Systems.
16As reported by Bruce V. Bigelow, staff writer for The San Diego Tribune on April 1, 2004:
17San Diego's Titan Corp. disclosed yesterday that the federal probe into allegations of
18 foreign bribes now includes two of its business units that were not previouslyidentified as part of the inquiry.
19In a notice filed with federal regulators, Titan said the government is now
20 focused on three of its business units. The San Diego defense contractor saidpreviously that only its Datron World Communications division, which sells military
21 radio equipment, was under scrutiny for possible illegal overseas payments. Datronoperates mostly in the Far East.
22The company said yesterday the inquiry also includes activities in Benin
23 conducted by its discontinued Titan Wireless business and its operations in SaudiArabia carried out by Titan Secure Systems.
2459. This was confirmed in Lockheed's Proxy Statement and Prospectus Supplement, filed
25with the SEC on March 31, 2004, and Titan's Form 10-Q, filed on May 10, 2004:
26Titan and Lockheed Martin have met with the SEC and the DOJ to discuss
27 the allegations ofimproper payments and on March 25, 2004, met with the SEC andDOJ to discuss the preliminary findings of the reviews. The discussion with the
28 government focused primarily on three of Titan's business units: the Datron World
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Communications division, which operates primarily in the Far East; Titan's activitiesin Benin , conducted as part ofTitan Wireless, a business unit that has been reportedas part ofTitan's discontinued operations since 2002; and Titan's operations in SaudiArabia, conducted through the Titan Secure Systems division.
60. On August 4, 2004, Titan reported in a Form 8-K filed with the SEC that it was
increasing its reserves to settle the investigation to almost $30 million:
As previously disclosed, Titan had reserved $3 million as of December 31,2003 for resolution of the government Foreign Corrupt Practices Act (FCPA)investigations . Titan recorded an additional provision in the second quarter of2004of $25. 5 million for anticipated settlement costs, and $8 . 8 million in merger andgovernment investigation-related expenses , mostly legal costs , incurred during thequarter . The company did not accrue for future legal costs expected to be incurred toreach resolution of the FCPA matter; those costs will be expensed as incurred infuture periods.
61. According to a second article written by Don Bauder and published in the San Diego
Reader on July 8, 2004, the San Diego Reader received another letter in the same typeface and
writing style as the first anonymous letter, reporting on Titan's bribes in Benin. That letter, received
in June 2004, reiterated the charge of illegal overseas payments and said that from 1998 to 2002,
Titan "established minority positions in startup companies and then transferred obsolete inventory to
avoid costly write offcharges." As with the first letter, Titan spokesperson Wil Williams denied this
allegation as "untrue."
62. Plaintiffs' counsel's investigation into these matters has uncovered further detail
concerning these or related bribes and other attempts to inflate Titan's revenues and earnings.
2. Titan Wireless Business Unit - Benin, Africa
63. Defendants' illegal and improper business activities in Benin, Africa included: (a) $2-.
$8 million in illegal payments to Karicom, a "facilitator" to assist Titan Wireless in obtaining
Beninese customs "exoneration"; (b) an improper $1.4 million disbursement for "T-shirts to support"
the Beninese President's election; and (c) improper recognition of revenue and the inflation of
accounts receivables of about $25-$30 million on a contract with the Benin national telephone
company, the Office of Post and Telecommunication ("OPT").
64. During 2000, Titan entered into an agreement with the OPT, a governmental entity of
the African country ofBenin. The agreement created Libercom - a joint venture between Titan and
OPT - to build telecommunication networks in Benin . The financial and deal-structuring duties for
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1 the Benin project were handled directly by defendants DeMarco and Ray, as well as Steve Head, the
2 Project and Country Manager for Titan Wireless. The project was originally slated to create revenue
3 of only $5 million for the development of a satellite network, but soon blossomed to more than $60
4 million for a variety of telecommunications projects, including a VSAT network, a GSM network,
5 digital switches and fiber optics.
6 a. Improper and Illegal Payments
7 65. Bribery drove this deal. Head made direct disbursements from a Benin ECOBANK
8 bank account which had no discernible business purpose. These were large, glaring payments that
9 could not be explained, and no supporting documentation or receipts could be found. Many ofthese
10 payments were to Karim Amadou or his company named "Karicom." Amadou was purportedly
11 "buddy-buddy" with Beninese President Kerekou. Amadou's ostensible role was as consultant and
12 as "inter-commerce facilitator" to assist with importing equipment and clearing customs. However,
13 Amadou's real job was to ensure that Titan/Titan Wireless received "exoneration" from customs
14 duties and levies when bringing equipment into Benin. Titan's disbursements to Amadou included
15 multiple payments of 100 million Beninese French francs (approximately $185,000 at current rates)
16 for a total of approximately $5 to $6 million. These disbursements were reflected on Titan's bank
17 statements received from ECOBANK in Benin. Sometimes these disbursements were in cash.
18 66. Karicom's role was as Titan/Titan Wireless' "agent" to fulfill "a combination of
19 functions" which included obtaining customs exoneration for the importation of equipment by
20 Titan/Titan Wireless into Benin. Titan hoped that these payments to Karicom would ensure "total
21 cxoneration" from the Beninese customs duties. While not able to deliver "total exoneration"
22 Karicom did, in fact, deliver "partial exoneration" ofTitan's customs duties. All the members ofthe
23 Titan Wireless/Titan Africa Board - which consisted of Head, Ray, O'Rourke, Bradley, and
24 DeMarco - were completely aware of the "status of exoneration," or lack thereof, on the Beninese
25 project. These individuals were also completely aware ofthe role that Karicom fulfilled in Benin for
26 Titan/Titan Wireless.
27 67. A percentage ofrevenues earned by the joint venture between Titan and the OPT was
28 paid to Karicom under the purported purpose of returning this money to the Beninese government.
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The dubious nature of this purported purpose is demonstrated by DeMarco's attempt to hide the
nature ofthese transactions. In particular, in carrying out these payments to Karicom, DeMarco told
Head to direct Karicom to send invoices to Titan Africa for work-related activity that Karicom did
not actually perform, such as for "site surveying" and other "technical work." Under DeMarco's
plan Titan received invoices for the fictitious work and paid Karicom based on these fictitious bills.
By directing Karicom to bill Titan for work that was not actually performed it obviously created a
problem for Titan because the disbursements were "auditable" but the work could not be verified as
it was never performed. The purpose of DeMarco's plan was to hide the bribery and to inflate
Titan's revenues.
68. Defendants' bribes even reached into the Beninese presidency as disbursements were
I used to assist Benin President Kerekou' s re-election campaign. For example, there was a $1.4
I million disbursement made by Head to buy T-shirts to support Kerekou's re-election campaign. All
told, there were between $7.5-$8 million in disbursements of the types described above.
69. DeMarco was responsible for transferring the funds to Benin so that Head could use
them for these disbursements. Head objected to DeMarco's instructions to handle the disbursements
to Karicom in this manner but was overruled by DeMarco in a March 2001 telephone conversation
that included Head, DeMarco, O'Rourke, current Titan CFO (and one-time Titan Wireless CFO),
Chris Caulson, and Shawn Lechie that took place in March 2001. DeMarco assured Head that he
I would tell Ray about the payments to Karicom.
70. These disbursements were listed on the Beninese P&L managed byHead, which was
circulated to DeMarco and Ray. The payments worked and Titan was successful in reducing
customs duties. Through Amadou's dealings, Barthemely Agnan, the Beninese Minister ofOPT, as
well as President Kerekou "made a lot of money" from Titan and, in exchange, Titan got a phony
I contract to report $60 million in revenue.
b. Inflated Revenue and Accounts Receivables
71. Titan also improperly recognized revenue and thereby inflated receivables in Benin.
For example, Titan obtained the Director of the OPT's signature for an addendum to their contract,
which permitted Titan to report an inflated amount of revenue for Titan's telecommunications
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project in Benin. The original contract for the satellite network developed and deployed by Titan for
Benin provided for $19 million in revenue with an additional 5% management fee drawn from the
revenues earned by the network once it was operational (a total of approximately $30 million).
However, the addendum increased the satellite portion ofthe contract and increased the management
fee from 5% to 20%, skyrocketing the value of the contract from $30 million to $60 million.
72. Booking revenue on the basis of this contract addendum was inappropriate. There
was no legitimate reason for the contract increase. Titan had not yet been paid anything by the
customer despite realizing huge outflows of cash to support activities in Benin including the
unverifiable disbursements. Further, Titan had no basis for expecting to be paid $60 million as it
was known that the Beninese had no ability to pay this amount. Titan knew that these receivables
were fictitious. Indeed, Titan had not required secured letters of credit from the Beninese, but had
rather obtained only unsecured letters of credit - something that is simply not done in Africa.
73. The subsequent history of this contract demonstrates this lack of collectability. An
internal PowerPoint draft presentation dated April 29, 2002 states that Titan Wireless management
believed that the only realistic source of revenue to pay Benin's debt was revenue from the project
and not funds from the Beninese government. Indeed, according to a May 2, 2002 briefing
document written by Titan Wireless President Eugene O'Rourke, Titan Africa had come to a
"gentleman's agreement" for repayment ofthe debt out ofproject revenue "ifdiscounted by 25%."
Before summer of 2002, the Beninese owed Titan/Titan Wireless approximately $50 million but had
not paid anything. By summertime 2002 it was obvious that Titan/Titan Wireless was not going to
get the full $50 million. No significant payments were made. There were negotiations to reduce the
amount owed by half, to only $25 million. By November 2002, the relationship between Titan and
the Beninese had deteriorated to the point that the differences between the parties were being
contested legally and no one associated with Titan "dared" to go to Benin.
74. The dubiousness of this account receivable and the omnipresence of bribery is also
1 made clear by events that occurred after Head left Titan Wireless. Efforts were made to salvage the
Benin contract after Head's departure in 2002. Titan had "totally lost control of the project." The
I Libercom entity was "stealing $1 . 5 million of revenues a month" that rightly should have been paid
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to Titan. The contract had "very clearly delineated cash flows" in terms of what the customer was
expected to pay to Titan, but these payments had not been made. As such, the project had "a very
large cash deficit" because the customer had not been paying Titan. Titan had already recognized
revenue on the project. As such, after Head's departure, efforts were made to renegotiate the
contract so as to come to terms with the Beninese to obtain payment.
75. Towards this goal Titan personnel approached the U.S. Ambassador to Benin, Pamela
Bridgewater , and requested her assistance in collecting the monies owed by the Beninese to Titan.
Together, Bridgewater and Head' s replacement met with various Beninese government officials,
including Benin President Kerekou. In one meeting with Bridgewater and President Kerekou,
Kerekou brought a "macro-economic advisor" and directed this individual to do everything
necessary to assist Titan in receiving payment. This advisor who told Titan that he could fix the
I situation for Titan but that he would require payment for doing so.
76. Titan executives were no strangers to Benin but rather were intimately involved in
these transactions and aware of these problems.
77. Indeed, all the members of the Titan Wireless/Titan Africa Board - which included
Ray and DeMarco - were completely aware of the "status of exoneration" or lack thereof on the
Beninese project and were completely aware of the role that Karicom fulfilled in Benin for
Titan/Titan Wireless. Ray and Demarco were informed of this by Head, who submitted accurate
information to the Titan Africa Board in the form of PowerPoint presentations . These PowerPoint
presentations detailed the monthly performance of operations in Benin for a given quarter, including
actual revenues compared to projected revenues for the period , in addition to revenues projected for
future periods.
78. In particular, once Titan personnel detected the suspicious disbursements, they
informed Eugene O'Rourke - the President of Titan Wireless - that there was a problem that might
involve violations of the FCPA. Defendant DeMarco would have been aware of the inappropriate
disbursements and inappropriately reported revenues occurring in Benin because Titan Wireless'
activities in Benin were not resulting in incoming cash for Titan and it had been necessary for
DeMarco to routinely "transfer funds" to support operations in Benin . Since these funds would have
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included the unaccountable $7.5-$8 million given to Amadou to spend for Kerekou's Presidential
campaign, DeMarco would have known what Head was using the money for. Defendant Ray also
was directly involved in the negotiations with the OPT and developed the deal for Titan in Benin.
Ray visited Benin and met directly with Beninese President Kerekou, met with the OPT, and later
returned to Benin to "turn on" the GSM network. Ray also entertained Barthelemy Agnan of the
Beninese OPT at his home in Rancho Santa Fe, California. Similarly, DeMarco was involved in
Benin as he traveled to Africa frequently to meet with Alcatel officials - the equipment
manufacturers for the Benin contract and to meet with Head. As such, top executives of Titan knew
of the existence of bribes and the uncollectibility of the Benin receivables.
79. DeMarco clearly understood the illegality of his actions. An hour before Head was
scheduled to have a conference call with Lockheed's attorneys regarding these transactions,
DeMarco called Head and told Head to tell the lawyers "as little as possible." DeMarco told Head
that if Head answered all the questions from the lawyers, "they'll go down a path we don't want to
go.
80. Eventually, after the Class Period Titan recorded an aggregate after-tax write-off of
$11.9 million pertaining to its discontinued Titan Wireless activities in Benin, Africa. This loss
included a full allowance for the remaining amount of the past-due $14.4 million receivable on the
underlying Benin contract, a 52.3 million after-tax provision related to a contingent liability
associated with a subcontractor on this project, and administrative and legal costs related to this
operation.
3. Titan Secure - Saudi Arabia and FAA Contract
81. Defendants' illegal and improper business activities in Titan Secure Solutions and
Titan Secure Systems (collectively, "Titan Secure") included: (a) Titan's gift of two Hewlett-
Packard Supercomputers to Saudi Arabia's Ministry of the Interior and Titan's failure to properly
expense the $5 million gifts; (b) hiring a third-party, "El Alm" - a "private subsidiary" of the
Minister of the Interior-- in order to win Saudi Arabia's National I.D. Card Project contract; (c) the
improper recognition of revenue based on the National I.D. Card Project; and (d) the improper
recognition of revenue on an unformalized agreement with the FAA to the tune of $3-$4 million.
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82. Titan Secure Solutions comprises divisions ofTitan Corporation that provide secure
solutions for governments and business. During 2003 and 2004 Titan Secure worked in Saudi
Arabia for the Ministry of the Interior and in the United States for the FAA, a civilian government
agency.
a. Titan Secure's Operations and National I.D. CardProject in Saudi Arabia
83. Titan's largest project in Saudi Arabia involved the creation of Saudi Arabia's
National I.D. Card Project. Titan had been trying to get a deal with the Saudis for the National I.D.
Card Project for over two years and was eventually awarded the contract on September 11, 2002.
84. In order to do business in Saudi Arabia, a foreign company must have a Saudi partner
or obtain a business license from the Saudi government. Titan had attempted to form a partnership
with a "rice and beans" commodity business, owned by Prince Al Sudan, but the Saudis had
"expressed displeasure" that Titan had not partnered with a more technical ly-relevant partner
company.
85. Titan thereafter began to seek a Saudi business license. A foreign company seeking a
business license must show "long-term commitment" to Saudi Arabia. The Ministry of Interior
I would help Titan obtain a business license from a different government office provided that Titan
could show the commitment that was required.
(1) The Saudi Ministry of Interior Was Gifteda $5 Million Supercomputer
86. In order to show its commitment to Saudi Arabia, Titan offered, and the Saudis
"accepted Titan's offer to make available use of equipment." Specifically, Titan offered two
Hewlett-Packard Superdome computers and granted "free utilization" of the systems. Although
Titan retained ownership of the computers formally, in reality, Titan had effectively given a $5
million computer to the Saudi Ministry of the Interior.
87. The systems arrived in Saudi Arabia around November/December 2002 and were
located in the Ministry Data Center in a room that had previously housed a mainframe computer for
the Ministry. Hewlett-Packard Superdome computers are used for simulating nuclear explosions and
can be substituted in place of full-fledged nuclear tests. The gift of the Superdome computers paid
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I off as Titan was awarded the National I.D. Card Project on September 11, 2002 and Titan's business
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II license was issued in December 2002.
88. Despite the fact that the computer was not intended for use on the National 1. D. Card
11 Project, and had been given away, it was maintained as an asset of the Company. Titan finally
11 admitted the failure to properly expense this asset, and declared the asset was impaired and discussed
11 writing off its value on the July 8, 2004 "Business Outlook" conference call:
Item 4, a non-cash asset impairment charge of 20-25 million, approximatelyhalf of which is attributable again to our Titan Secure Solutions Division. Theseimpairments pertain to two large computer systems purchased in 2000 and 2002.With one system supporting a program for US civilian government agencies. Andthe other for our business activities in Saudi Arabia.
On the other system in Saudi Arabia, given that we have decided to curtailour activities in a [sic] that marketplace, we expect to not be able to recover ourinvestment in the computer systems.
On August 9, 2004, when Titan filed its June 30, 2004 Form 10-Q, defendants stated that Titan had
recorded asset impairment charges for assets in Saudi Arabia:
Approximately $ 10 million of these charges pertain to impairment of fixed assetsdirectly related to the termination ofa program by a U. S. civilian government agencyin the second quarter, and impairment of assets associated with a reduction in scopeof planned business activities in Saudi Arabia.
Furthermore, defendants disclosed that Titan had "$5.1 million in losses resulting from our National
I.D. card system contract in Saudi Arabia."
Document 17 Filed 09/ /2004 Page 33 of
(2) Titan Hired a Private Consulting CompanyOwned by the Saudi Minister of the Interiorto Get Awarded the Project
89. Another condition ofthe National I. D. Card Project with Saudi Arabia was that Titan
had to hire employees from a consulting company owned by the Minister of the Interior, or his
family members. In putting together the National I.D. Card Project, Titan had been dealing with the
Saudi Minister ofthe Interior. One consulting company Titan was obligated to hire, was "El Alm," a
company made up of "employees" of the Ministry of Interior who "wear a lot of hats" and would
take an "absence" from the Ministry to work on El Alm projects.
90. During the original contract negotiations ofthe National I.D. Card Project, there had
been a purported agreement between the Saudis and Titan that some of the research and development
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1 on the project would be handled by the Saudis. However, El Alm did not actually have personnel
2 available to do the work.
3 (3) Titan Improperly Recognized Revenue forTitan Secure in Saudi Arabia and Failed to
4 Timely Write-Down the Value of the AssociatedAssets
591. Titan improperly recognized revenue in Saudi Arabia. Mike Walker, General
6Manager of Titan Secure Solutions, had "over-promised" Titan Secure's performance prospects.
7The actual performance of the division failed to meet Walker's expectations and Walker began
8reporting "future revenues" prior to those revenues being properly earned.
992. One particular Saudi procurement involved the shipment ofprinters and cameras to
10Saudi Arabia for the National I.D. Card Project where revenue was booked, but unlikely to be
11collected. Earlier, Titan had shipped a large quantity of printers and cameras, enough to equip 85
12field offices where Saudi identification cards are issued, "knowing they would not work for the
13intended purpose because the specifications necessary for the printers had not yet been developed."
14The printers and cameras sat around Titan's offices in Riyadh during 2003 and were later relocated
15to a warehouse somewhere in Saudi Arabia. By December 2003 the cameras and printers still had
16not been put to use for their intended purpose.
1793. By June 2003, Titan's secure National I.D. Card Project in Saudi Arabia was in
18severe condition due to delays in completion. The system for the National I.D. Card Project had not
19gone live or been deployed, and Titan had only presented demonstrations.
2094. The Saudis had bound Titan to complete work on the project by getting a surety bond
21from Titan for something like $500,000. In the event Titan did not complete the required work, the
22Saudis would be able to claim the $500,000 surety bond at Titan's expense. Titan also did not want
23to abandon the project because Titan had previously booked revenue for work performed on the
24project. Thus, if they did not fulfill their obligations they risked not getting paid at all by the Saudis.
2595. The National I.D. Card Project finally went "into production" - around April/May
262004. However, by then the Saudis were suing Titan for "consequential damages" for failing to
27perform the contract properly according to the contract terms.
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96. On August 4, 2004, Titan reported a loss of $5 million on the National I.D. Card
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Project, and an asset impairment charge of between $6 and $12 million relating to business activities
in Saudi Arabia.
b. Titan Secure Inappropriately Recognized Revenue andFailed to Reserve for Uncollectible Accounts Receivableand Write-Down Impaired Assets of Its FAA Contract
97. On July 22, 2003, Titan announced that it was awarded a $200 million ID/1Q FAA
Engineering Support Services Contract. The press release stated that the FAA awarded Titan "an
indefinite delivery, indefinite quantity (fD/IQ) contract having a potential value of$200 million over
the next ten years."
98. Titan/Titan Secure was to perform approximately a dozen different subcontracts with
the FAA but each sub-project required its own formal contract and authorization from the FAA. On
one such sub-project Titan did not formalize the agreement with the FAA but began performing
work and improperly booking revenue associated with the project on the basis ofa verbal agreement
with an FAA representative, Rick Ford.
99. In early 2004 the FAA conducted an internal reorganization and put a new individual
into the Chief Information Officer ("CIO") position that was previously held by Ford. The person
who replaced Ford began "looking closely" at various contracts and projects in which the FAA was
involved and detected that Titan had been billing the FAA for work on the project even though no
formal contract existed. The FAA informed Titan/Titan Secure in March 2004 that they were
"disallowing a whole bunch of work" that had been performed by Titan and that the FAA would not
be paying Titan for the amounts that had been billed. Furthermore , the FAA had decided not to use
any of the work that had been performed by Titan/Titan Secure on the entire vehicle contract.
100. Altogether Titan/Titan Secure reported $3-$4 million in inappropriate revenues and
receivables associated with the FAA work over a period of time . Regardless of which quarter the
$3-$4 million in revenue was recognized , Titan Secure's accounts receivables and assets were
impaired.
101. Because Titan was notified in March 2004 by the FAA that they were "disallowing a
whole bunch ofwork" and that they had decided not to use any of the work that had been performed
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1 by Titan/Titan Secure on the entire vehicle contract, Titan should have recognized this asset
2 impairment in the quarter in which it was realized (first quarter ending March 31, 2004). Instead,
3 Titan did not recognize this asset impairment until it was finally discussed on Titan's July 8, 2004
4 "Business Outlook" conference call where they warned of a non-cash asset impairment charge of
5 $20-$25 million:
6 In the second quarter we were informed by the civilian agency that they weremoving the program back to within the agency. And that the utilization of the
7 computer system we had purchased would no longer be needed.
8 102. In Titan's June 30, 2004 Form 10-Q Titan recorded the asset impairment charge of
9 $22.7 million of which approximately $10 million related to the FAA termination and other
10 problems.
11 4. Datron World Communications Division - Far East/Asia
12 103. Some of Titan's FCPA violations involved its Datron subsidiary. Defendants' illegal
13 and improper business activities in its Datron division include: (a) bribes associated with Datron
14 representatives in Sri Lanka and Bangladesh; (b) a huge $9 million bribe designed to obtain a $20
15 million contract with the Sri Lankan army; and (c) the improper recognition of revenue on shipments
16 to Indonesia.
17 a. Improper and Illegal Payments
18 104. Datron's customers were typically military organizations for countries like Sri Lanka
19 and Indonesia. Datron's business involved the use of approximately 100 sales representatives
20 throughout the world. These representatives served as a local presence for Datron and brought
21 business to Datron based on the representative's command of the language and local connections.
22 Datron representatives received a commission for their roles in facilitating deals. The commission
23 was a percentage of the overall value of the contract. Datron did not verify how that representative
24 utilized the commissions given to the representative, and therefore, a sales representative could
25 receive a particularly large commission, the purpose of which was to use those funds to pay a
26 government official in exchange for some favor being extended by the official to Datron.
27 105. Lockheed, in the course of its due diligence investigation of Titan, detected bribes at
28 Datron which they reported to the DOJ as possible FCPA violations. Two Datron representatives
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that have been associated with the bribes are . Ranjan Gomez (for Sri Lanka) and Shajad Ali (for
Bangladesh). These individuals were supervised by Datron Internal Sales Representative JeffGood,
who was responsible for the entire Pacific Rim region, which included Indonesia and Sri Lanka.
106. One of the suspicious transactions carried out by Datron involved a huge $20 million
contract with the Sri Lankan army in 2001. The amount ofthe "commission" paid demonstrates that
this deal clearly involved bribery. The deal, negotiated by Datron's President Art Barter, totaled $20
million of which the Datron representative on the deal, P.T. Menial Esa, received $9 million in
commissions and `fees." Based on the size of the transaction, it would have been reviewed by
Titan's management.
b. Improper Recognition of Revenue
107. One unusual element of the Indonesian army deal was that the Indonesians had
requested that the radios purchased from Datron be shipped completely disassembled, down to the
individual diode level. Shipping the systems disassembled proved to be very problematic because
the Indonesians did not have the expertise to reassemble the systems. As such, it became necessary
for Datron to send engineering personnel to Indonesia to reassemble the systems.
108. United States Customs ("U.S. Customs") authorities "seized" the radios being
shipped to Indonesia and refused to allow the systems to ship . The U. S. Customs authorities
apparently detected a discrepancy in Datron's Bill of Lading , and thereafter, shipments by Datron
became "blacklisted" by U.S . Customs to ensure that Datron was not exporting prohibited military
technology out of the country. As a result, Datron had 16 shipments to various customers seized or
delayed by U.S. Customs.
109. Because of the delays in getting the products released from U.S. Customs, the
Indonesians concluded that Datron was late in meeting the delivery date for the systems resulting in
difficulties for Datron getting paid on the contract. Despite this known risk of not getting paid and
the U.S. Customers problems, Datron booked revenue on the shipments to Indonesia as soon as the
systems were delivered to a freight-forwarder in Los Angeles.
110. Titan announced on July 8, 2004, that it had offered for sale its Datron business and
its Titan Scan Technologies service business. The Company recorded an aggregate after-tax loss in
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discontinued operations of $24.6 million in 2Q04 related to these two businesses . The loss is
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11 primarily comprised ofthe impairment of intangible assets, mostly goodwill, and fixed asset values
11 not expected to be recovered.
E. Alive Pre-Class Period Statements Made False and/or Misleading byDefendants ' Conduct
111. Prior to the Class Period, defendants made statements to the investment community,
in addition to their adherence to Titan's Code of Conduct and the FCPA, that were alive in the
market at the beginning of the Class Period, and false or misleading as a result of defendants'
conduct set forth above. These statements included false revenues, earnings, accounts receivables
and other asset violations set forth in their financial filings with the SEC from at least FY00. Other
statements made by defendants relating to their businesses where this conduct occurred were equally
false and/or misleading and contained the material omission of this conduct. For example:
(a) On June 2, 1999, Titan announced the execution of an agreement to create a
telecom infrastructure for Benin with a value exceeding $60 million. The press release stated:
The Titan Corporation announced today that its Afronetwork , Inc. (AFNI) partner inBenin West Africa has executed a definitive agreement with ALCATEL of Francefor the supply of advanced state-of-the - art telecommunications infrastructure to the"Office des Postes and Telecommunications (OPT), Benin" under a set of "BuildCooperate and Transfer" (BCT) agreements between AFNI and the OPT.
The total value of the project was expected to exceed $60 million.
Commenting on the contract, defendant Ray stated:
"We are very pleased to have fully participated in making this multi-nationalcooperation happen." ... "We believe the project in Benin will serve as a prototypefor regional cooperation in telecommunications infrastructure improvements inAfrica and elsewhere, and fully satisfies our new vision for our globaltelecommunications subsidiary, Titan Wireless," he added.
(b) On April 1, 2002, Titan filed its Annual Report on Form 10-K for FY01.
Defendants reported revenues of $331.9 million for 4Q01, a 21 % increase over revenues of $274.9
million for the same period a year ago. The defendants also reported accounts receivables of$430.8
million . The report was signed by defendants Ray, Sopp, DeMarco, and Hom (Lund). Additionally,
the defendants represented the following:
While Titan Wireless has historically generated most of its revenues bysupplying communications systems and products and providing related integration
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1 services in developing countries, Titan Wireless is increasingly generating revenuesfrom providing communications services over this network....
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3Revenues of approximately $27.4 million, or approximately 29.5%, of Titan
4 Wireless 's revenues were generated from the Benin project during 2001. InOctober 2000, we collected an $18.0 million receivable from an African group
5 related to a sale of a portion of our economic interest, net of all fixed equipmentpayments, in the revenue sharing of this project.
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7For the year ended December 31, 2001, Titan Wireless had revenues of
8 approximately $92.7 million, which represented 8.2% ofour consolidated revenues.
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10 Titan Wireless has historically generated most of its revenues by supplyingcommunications systems and products and providing related integration services in
I1 developing countries. Titan Wireless is increasingly generating revenues fromproviding communications services over itsglobal communications network While
12 the majority ofservice revenues are currently being generatedfrom long distancecarriers that use our network to carry their long distance communications traffic to
13 andfrom developing countries, service revenues are starting to be generatedfromretail customers in developing countries.
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15Titan Wireless' revenues increased from $27.3 million in 1999 to $81.4 million in
16 2000 and from $81.4 million in 2000 to $92.7 million in 2001. Increased servicerevenues in 2001 of $17.5 million generated by Titan's consolidated joint venture,
17 Sakon, in Latin America, Africa, and the Middle East, and increased revenues of$17.2 million in new international business, primarily in certain countries in Africa,
18 were offset by reduced revenues of approximately $23.4 million on Titan Wireless'project in Benin to build a telecommunications system for its customer, The Office of
19 Post and Telecommunication of Benin ("OPT"), as Titan Wireless completed thesystem during 2001. The revenues in 2001 recorded on this project are aresult of the
20 expansion of the original project to include: increased GSM lines, expansion of thecapacity and capability of the VSAT sites and an overall increase of lines in the
21 country of Benin. The increase in 2000 revenues was due primarily to TitanWireless's contract with the OPT, and, to a lesser extent, the increased services
22 revenues generated by Titan's consolidated joint venture, Sakon LLC, in LatinAmerica, Africa, and the Middle East.
23
24 Allowance for doubtful accounts . We provide a reserve against our
25 receivables for estimated losses that may result from our customers' inability to pay.These reserves are based on potential uncollectible accounts, aged receivables,
26historical losses, our customers' credit-worthiness, changes in government fundingon certain of our contracts and adjustments that may arise from audits by the Defense
27Contract Audit Agency ("DCAA") of certain ofour government contracts. Should acustomer's account become past due, we generally will place a hold on the account
28 and discontinue further shipments and/or services provided to that customer,minimizing further risk of loss. The likelihood of a material loss to Titan on an
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uncollectible account in our commercial business would be principally dependent ona deterioration in economic and/or political conditions in a particular country, such asBenin, Africa, in which our receivables due from the government controlled phonecompany of Benin may be impacted.
Titan's results of operations have historically fluctuated and may continue tofluctuate significantly in the future, which could adversely affect the marketprice of its common stock.
Titan's revenues are affected by factors such as the unpredictability ofsalesand contracts awards due to the long procurement process for most of its productsand services, defense and intelligence budgets, the time it takes for the new marketsTitan targets to develop and for Titan to develop and provide products and servicesfor those markets, competition and general economic conditions. Titan's productmix and unit volume, its ability to keep expenses within budgets, its distributionchannels and its pricing affect its gross margins. These factors and other risk factorsdescribed herein may adversely affect Titan's results of operations within a periodand cause Titan's financial results to fluctuate significantly on a quarterly or annualbasis. Consequently, Titan does not believe that comparison of its results ofoperations from period to period is necessarily meaningful or predictive of its likelyfuture results of operations. It is possible that in some future quarter or quartersTitan's operating results will be below the expectations ofpublic market analysts orinvestors. If so, the market price ofTitan's common stock may decline significantly.
(c) On March 31, 2003, Titan filed its 2002 Report on Form 10-K with the SEC.
In this filing, defendants reported $1.392 billion in revenues and a loss of $271 million, with net
accounts receivables of $314.3 million. In this filing, defendants made the following false
statements with regards to the particular accounts receivables associated with the Titan Wireless
project in Benin:
Titan Wireless's wholly-owned subsidiary, Titan Africa, inc., completedwork on a satellite-based communications system for Benin's national telephonecompany during 2001.... The terms of Titan Wireless's agreement with the OPT topay for this receivable and further amounts include, among other things, a revenuesharing of total net receipts on this project for up to a maximum period of 9 years,depending upon when the equipment has been paid for. The remaining carryingvalue of the net receivable as ofDecember 31, 2002 is approximately $34.6 million.Approximately $2.4 million of collections were received in 2002, and approximately$3.7 million has been collected through March 25, 2003.
Titan's 2002 Form 10-K at 24 . The Form IO-K also discussed FYOI and FY00 charges and made no
Imention ofany charge or reserve relating to Benin ' s accounts receivables . Id. at 31-32. The Form
10-K stated that with relation to the Benin receivable "[a]s of December 31, 2002, the carrying
value, net of non-recourse debt, due on this contract was approximately $34.6 million." Id. at 37.
The document was signed by defendants Ray, Sopp, and Lund.
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(d) Titan's 2002 Form 10-K also contained the following misleading statement
with regards to Titan's compliance with U. S. laws:
We must comply with and are affected by various government regulations.These regulations affect how we and our customers can do business.... Any failure tocomply with applicable laws could result in material fines and penalties or affect howwe conduct our business in the future.
Id. at 16-17.
(e) Titan's 2002 Form 10-K also contained the following misleading statement
with regards to the methods which Titan used to value long-lived assets:
Valuation of goodwill, intangible and other long-lived assets. We useassumptions in establishing the carrying value , fair value and estimated lives of ourlong-lived assets and goodwill .... Factors that would influence the likelihood of amaterial change in our reported results include significant changes in the asset'sability to generate positive cash flow , loss of legal ownership or title to the asset, asignificant decline in the economic and competitive environment on which the assetdepends , significant changes in our strategic business objectives, utilization of theasset , and a significant change in the economic and/or political conditions,particularly in which we have investments.
Id. at 40.
V. DEFENDANTS' FRAUDULENT SCHEME AND COURSE OF CONDUCT
112. With the above activities remaining undisclosed to the market, the above statements
still alive, and assets being carried on Titan's books, defendants (minus DeMarco who left under
pressure from the Board) set out to make Titan appear attractive as a take-over target so that they
could reap the benefits of Titan's apparently spectacular performance.
A. Defendants Position Titan for Acquisition
113. In the fall of 2002, Thomas G. Pownall, a former director of Titan and retired
Chairman and CEO of Martin Marietta Corporation, a company that combined with Lockheed in
March 1995 to form Lockheed Martin, contacted defendant Ray (Titan's Chairman, President and
CEO) to introduce Frank H. Menaker, Senior Vice President and General Counsel of Lockheed
Martin. In connection with that introduction, Mr. Menaker suggested that it could be mutually
beneficial for Lockheed Martin and Titan if Ray met with Robert J. Stevens, Lockheed Martin's
President and COO. Subsequently, Mr. Stevens sent Ray a letter suggesting they meet at a mutually
convenient time.
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114. Ray responded to Mr. Stevens in early October 2002, and the officers discussed
generally the businesses of their respective companies. In December 2002, Mr. Stevens contacted
Ray to discuss possible strategic initiatives involving their respective companies. Mr. Stevens told
Ray that the invitation to meet together with Dr. Vance D. Coffman, Chairman and CEO of
Lockheed, remained open.
115. During 2002, Ray shifted the Company's focus back to government work shutting
I down Titan's commercial work. The costs to exit commercial businesses led to Titan' s largest loss
of$271.5 million, causing Titan's shares to tumble by 50% from their trading level of $20 per share
in early January 2002 down to $10 per share by the end ofFY02. By April 14, 2003, the Company's
stock had declined to $6.80 per share.
116. After the announcement of the acquisition of Veridian Corporation by General
Dynamics in June 2003, defendant Ray sought and obtained information from Relational Advisors
LLC regarding Titan's implied value at the valuation multiples paid by General Dynamics for
Veridian. This information implied that Titan might be able to command a significant premium to
its then-current trading price through a similar transaction.
117. On July 23, 2003, Titan's Board of Directors authorized Ray and Titan executive
management to meet with Lockheed to explore the terms ofa sale ofTitan to Lockheed. Defendants
knew that an acquisition by Lockheed was substantially dependent upon Titan's reporting favorable
financial results and Titan' s ability to represent to the public and Lockheed that it had not engaged in
illegal practices . Titan's ability to report increasing revenues and earnings throughout the Class
Period was vital to the Company's success and to assuring Lockheed would acquire Titan. Foreign
payments are a particularly sensitive area for Lockheed, who in 1995 paid one of the biggest
penalties ever - $24. 8 million - for violating the FCPA after an executive was found to have bribed
an Egyptian politician to win a contract. Indeed, the legislative origins of the FCPA arose in the
1970s from another Lockheed bribery scandal. Defendants also discussed and negotiated
continuously throughout the Class Period the Company's business, the merger, and the level of
I disclosure Titan would make concerning its foreign business practices, especially the illegal
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"consulting" payments and could derail the merger . Disclosing and accounting for this misconduct
would be costly.
B. Defendants Issue False Financials and Guidance and OmitViolations of the FCPA and GAAP
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118. On July 24, 2003, Titan announced to the investment community that it was
increasing its reserve and earnings for FY03 and FY04 , causing its stock to spike from $11 to nearly
$16 per share in a single trading session on very high trading volume . On that date, the Company
issued a press release entitled , "Titan Reports Record Quarterly Revenues of$438 Million, up 27%,"
which reflected strong growth in revenue , operating margins, and earnings per share and increased
2003 and 2004 earnings guidance , and stated in relevant part:
Titan reported record quarterly revenues for the second quarter of 2003 of$438 million, an increase of 27% from $346 million in the second quarter of 2002.The increase was a result of29% organic revenue growth generated by Titan's corenational security solutions business.
Net income for the second quarter of 2003 was $5.9 million , or $0.07 pershare, compared with a net loss of $11.8 million or ($0.16) per share for the secondquarter of 2002.
119. Commenting on these results, defendant Ray stated:
"Titan is on track for a record year of growth and profits." ... "We areparticularly proud of the 29% year-over-year revenue increase in our core nationalsecurity business, which now accounts for over 99% of our revenues. We were alsoable to ramp up quickly on new contracts, which accelerated program execution andrevenue growth. ["]
120. Defendants' press release also increased guidance for 2003:
The Company is increasing its guidance for fiscal 2003 by announcing that itexpects'revenue to be between $1.725 billion and $1.775 billion. Earlier guidancehad been for revenues in the range of $1.59 billion to $1.61 billion.
The Company is also increasing its guidance by announcing that it expectsfiscal 2003 pro forma earnings per share from continuing operations to be $0.70 to$0.72. Previous guidance had been $0.63. GAAP earnings per share , including thecharge for debt extinguishment costs of $12.4 million, are expected to be in the rangeof $0.52 to $0.54. Previous guidance for GAAP earnings per share was $0.46.
121. Defendants also increased guidance for 2004:
The Company's guidance for fiscal 2004 revenue is $2.0 billion to $2.1billion, representing a year-over-year growth rate of 16% to 18%. Earnings per shareon a GAAP basis is expected to be in the range of $0.84 to $0.88.
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"The improved outlook for the remainder of 2003 and for 2004 reflects ourrecord backlog, large program execution expertise, our bid and proposal pipeline andour proven ability to execute our business development initiatives," Ray said. "Intoday's environment of continuing geopolitical threats, we believe there will beincreasing demand for Titan's proven capabilities in providing National SecuritySolutions."
Guidance Summary
(in millions except for earnings per share)2003 2004
Revenues $1,725 to000 to $2 100$2$1,775
, ,
Revenue growth rate 24% to 27.5% 16% to 18%Pro forma EPS $0.70 to $0.72 $0.87 to $0.91GAAP EPS $0.52 to $0.54 $0.84 to $0.88EBITDA $142 to $148 $170 to $178Free cash flow from $54 to $64 $75 to $85continuing operations
122. Immediately after this announcement, which omitted any revelation of the revenue
generated as a result of FCPA violations, Titan's stock jumped from $11.26 per share on July 23,
2003 to as high as $16.16 per share on July 28, 2003.
123, These results were repeated when Titan filed its quarterly Report on Form 10-Q on
August 11, 2003. This report was signed by defendants Ray and Sopp. Additionally, the Company
I represented the following:
The accompanying financial information includes substantially allsubsidiaries on a consolidated basis and all normal recurring adjustmentswhich are considered necessary by the Company's management for a fairpresentation of the financial position, results of operations and cash flows forthe periods presented.
C. Defendants Negotiate a Merger with Lockheed
124. Thereafter, at a meeting held on August 6, 2003, in Washington, D.C., defendants
Ray and Sopp met with Jeffrey D. MacLauchlan , Lockheed's Vice President , Financial Strategies,
and with Frank H. Menaker, Lockheed' s Senior Vice President and General Counsel , to discuss
Lockheed ' s interest in acquiring Titan. During the August 6, 2003 meeting, members ofLockheed's
management indicated that their review of Titan to date had been limited to publicly available
information, but that they would like to conduct detailed "due diligence" of Titan. Of particular
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1 importance to Lockheed was Titan's compliance with all U.S. export regulations, as in 1995
2 Lockheed had paid one of the biggest penalties ever - 524,8 million - for violating the FCPA. On
3 August 6, 2003, Titan and Lockheed entered into a Confidentiality Agreement and Titan prepared to
4 provide Lockheed with certain ofTitan's non-public information which would be controlled by Ray
5 and Sopp.
6 125. On August 12 and August 13, 2003, Lockheed and Titan management met in San
7 Diego, California. Titan management briefed Lockheed on certain due diligence matters. Lockheed
8 made a number of follow-up due diligence requests, and the parties discussed the process for due
9 diligence going forward. Again, Lockheed expressed particular interest in Titan's compliance with
10 all U.S. laws and export regulations.
11 126. On August 15, 2003, based on its preliminary due diligence review, Lockheed wrote a
12 letter to Ray suggesting that Lockheed acquire Titan by merger for $20 per share for Titan common
13 stock, which represented a 30% premium to the closing price of Titan common stock on August 14,
14 2003. Lockheed's letter proposed paying the acquisition price 50% in cash and 50% in Lockheed
15 common stock subject to further due diligence and Lockheed Board of Directors' approval.
16 127. On August 20, 2003, Titan's Board of Directors met to consider Lockheed's proposal
17 compared to the prospect of Titan continuing to operate on an independent basis or Titan pursuing
18 alternative strategic transactions. Titan's,Board of Directors received presentations from Titan's
19 management team, including Ray and Sopp, and Relational Advisors. Titan's Board of Directors
20 instructed Ray to reject Lockheed's $20 per share offer in favor ofshopping the Company around for
21 a better price. However, with one $20 per share offer in-hand, defendants determined not to shop the
22 Company around publicly because that would likely expose them to further due diligence requests.
23 Instead, defendants decided to shop the Company to a select group of four defense firms with whom
24 they determined they could actively limit the due diligence.
25 128. At the August 20, 2003 meeting, Titan's Board of Directors approved retention,
26 severance and other payments to certain Titan employees which would be triggered by the now
27 imminent "change of control" of Titan. These benefits included:
28
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(a) , New "change in control" benefit provisions for Ray and Sopp entitling them
to a lump sum payment amount equal to three times the sum oftheir base salary and their "Highest
Annual Bonus," upon their termination, even their voluntary resignation, following the Lockheed
acquisition, plus outplacement services valued at up to $100,000. Based on their then-current
compensation levels, the total estimated cost of the severance payments and continued welfare
benefits payable to Ray and Sopp were approximately $5.6 million and $2 million, respectively.
(b) Immediate vesting upon consummation ofthe merger of all stock options that
had been previously granted to the executives to acquire shares of Titan, which would remain
exercisable in Lockheed stock for the remainder of their original terms. With the acceleration of
their stock options, Titan's executive officers and directors would receive the following amounts:
Gene W. Ray $4,542,113Nicholas J. Costanza 1,463,632Mark W. Sopp 1,217,381Charles R. Saffell, Jr. 349,424Paul W, Sullivan 681,302Allen D. Branch 512,887Thomas J. Brennan 577,454Lawrence J. Delaney 605,938A. Anton Frederickson 529,925Ronald B. Gorda 529,925Robert J. Osterloh 632,719Earl A. Pontius 613,867Leslie A. Rose 733,699Robert J. Whalen 605,938All directors and executive officers (32 persons) $17,010,598
(c) Retention bonuses valued at over $4.7 million.
(d) Severance benefits valued at approximately $7.8 million.
(e) Extra bonuses for two executives, including Sopp "in recognition of their
performance relating to the proposal for a strategic transaction."
(1) All "headquarter employees" including Ray and Sopp, would receive their full
2003 incentive bonus, regardless of the Company's actual performance in 2003.
129. Following the August 20, 2003 meeting, defendants contacted the four other defense
companies identified as potential alternative purchasers. Two of the companies were not interested
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in pursuing discussions with Titan and two of the companies executed a confidentiality agreement
with Titan.
130. On August 29, 2003, Ray received a revised offer from Lockheed of$20 per share of
Titan common stock in cash or $21.50 per share payable half in cash and half in Lockheed common
stock. Thereafter the two other defense firms that had previously expressed interest in acquiring
Titan indicated they did not want to pursue an acquisition of Titan.
131. On September 5, 2003, Titan received a revised offer from Lockheed of$22 per share
of Titan common stock, payable halfin cash and half in Lockheed common stock. The revised offer
was conditioned upon additional due diligence. On that date, Lockheed rejected Ray's request that
the offer be increased and instead provided Titan with a detailed list of due diligence items that it
wanted to review.
132, On September 9, 2003, representatives of Lockheed and Titan, including executive
vice presidents from three of Lockheed's business segments and all but one of the eight business
sector presidents of Titan, met to discuss reciprocal due diligence issues in McLean, Virginia. On the
same day, a separate, inter-disciplinary subject-area due diligence team from Lockheed met with
representatives of Titan in San Diego. Lockheed's and Titan's respective due diligence review
continued through September 15, 2003. Throughout the due diligence processes, defendants
continued to conceal the illegal payments to foreign consultants.
133. A special telephonic meeting ofthe Titan Board ofDirectors was held on September
15, 2003 and Titan's Board ofDirectors unanimously approved the merger with Lockheed at $22 per
share. Lockheed's Board of Directors also approved the acquisition.
134. Also on September 15, 2003, the Board of Directors increased Sopp's target bonus
under the Titan Annual 2003 Incentive Plan by 15% of his annual base salary, having a value of
$48,750, simply for causing the merger to occur. This payment has already been made to Sopp, as
have been all 2003 incentive bonuses.
135. The merger agreement with Lockheed contained the following representations and
warranties made by Titan (defined as the "Company" in the agreement):
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5.21 Relations with Governments . To the knowledge ofCompany, neitherCompany nor any of its Subsidiaries, nor any director, officer, agent or employee of
Company or any of its Subsidiaries, has (a) used any funds for unlawfulcontributions, gifts, entertainment or other unlawful expenses related to politicalactivity, (b) made any unlawfulpayment or offered anything ofvalue toforeign ordomestic government officials or employees or toforeign or domestic governmentofficials or employees or toforeign or domestic political parties or campaigns, (c)made any other unlawful payment, or (d) violated any applicable export control,money laundering or anti-terrorism law or regulation, nor have any of themotherwise taken any action which would cause Company or any ofits Subsidiariesto be in violation ofthe Foreign Corrupt Practices Act of 1977, as amended, or anyapplicable law of similar effect.
136. In making that representation, defendants were fully aware, that ifcaught, Lockheed
could and most likely would terminate the Merger Agreement. Pursuant to §8.1(c)(i) ofthe Merger
Agreement, Lockheed could terminate the merger if Titan.breached
any representations, warranties , covenants or obligations contained in thisAgreement, which breach would result in the failure to satisfy one or more of theconditions set forth in Section 7.3(a), and in any such case such breach shall beincapable of being cured or, if capable of being cured, shall not have been curedwithin 30 days after written notice thereof shall have been received by the partyalleged to be in breach....
The conditions of §7.3(a) that would result in a breach allowing Lockheed to terminate the merger
I included
(ii) the representations and warranties of Company contained in this Agreement,without regard to any materiality or Material Adverse Effect qualifier containedtherein, shall be true and correct on and as of the date made and on and as of theClosing Date as if made at and as ofthe Closing Date (except for any representationsand warranties made as of a specified date, which shall be true and correct as of thespecified date), except where the failure ofsuch representations and warranties to betrue and correct would not reasonably be expected to have, individually or in theaggregate, a Material Adverse Effect on Company and would not materially impairCompany's ability to perform its obligations under this Agreement....
Exhibit A to the merger agreement defines a Material Adverse Effect as follows:
"Material Adverse Effect" means, with respect to any entity, (a) anyadverse change, circumstance, fact, event or effect that, individually or in theaggregate with all other adverse changes, circumstances, facts, events and effects, isor is reasonably likely to be materially adverse to the business, condition (financialor otherwise), assets or results of operations of such entity and its Subsidiariestaken as a whole ... or (b) a material adverse effect on the ability of such entity toperform its obligations under this Agreement.
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I D. Defendants Announced the Merger Agreement with LockheedWithout Disclosing the FCPA and GAAP Violations
2137. On September 15, 2003, Titan and the Lockheed announced that Lockheed would
3acquire the outstanding shares of Titan in exchange for consideration valued at $22 per share,
4comprised of a mix of cash and Lockheed stock. The offer was valued at $1.8 billion, plus the
5assumption of an additional $600 million in Titan debt. The transaction was expected to close
6following the Titan shareholder meeting scheduled in March 2004. Commenting on the merger,
7defendant Ray stated:
8"We are extremely proud of our track record ofgrowth and dedicated service
9 to our nation during our 22-year history ." ... "Lockheed Martin is acquiring Titan toexpand and grow the business. Together we will offer a broader spectrum of system
10 and IT solutions to our customers. As such, I am confident that this match is awinner for our customers and employees."
11138. On the news of the merger, the Company's stock price again spiked 25%, or $4.33
12from $16.96 to over $21.29 per share on extremely high trading volume.
13E. Titan Continues to Issue False Financials and Omits Impact
14 of Violations of the FCPA and GAAP
15 139. On October 23, 2003, the Company issued a press release entitled "Titan Reports
16 Record Quarterly Revenues of $472 Million, Up 34%; GAAP EPS $0.18; Pro Forma EPS(1) $0.20,"
17 which stated that results reflected record organic growth in revenue, and improved operating margins
18 and earnings per share and stated in relevant part that:
19 Titan reported record quarterly revenues for the third quarter of2003 of$472million, an increase of 34% over $353 million in the third quarter of 2002. The
20 organic growth for the quarter was 33% over the prior year, driven by growth inTitan's core National Security Solutions business.
21Net income for the third quarter of 2003 was $15.2 million, or $0.18 per
22 share, compared with a net loss of $225 million or $2.89 per share for the thirdquarter of 2002.
23140. Commenting on these results, defendant Ray stated:
24"The record revenues and continued operating margin improvements this
25 quarter demonstrate our ability to execute our strategy of generating new business,winning recompetes, and implementing operational efficiencies." ... "As planned, we
26 have grown our business organically as a provider of choice for mission criticalcommunications and intelligence solutions for the Department of Defense,
27 Department of Homeland Security, and other federal agencies."
28 141. Defendants also further increased guidance for FY03 and FY04:
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Citing continued gains in revenue, improvements in operating margin, andexceptionally strong cash flow generation, the'Company is increasing guidance forthe balance ofthe current year and for FY 2004. Revised FY 2003 revenue guidanceis $1.775 billion to $1.8 billion; GAAP earnings per share are anticipated to be $0.54to $0.56; and guidance for pro forma earnings per share has increased to $0.72 to$0.74 per share . Revised FY 2004 revenue guidance is $2.1 billion to $2.2 billion,and GAAP earnings per share are anticipated to be $0.87 to $0.93.
142. Commenting on this increased guidance, defendant Ray stated:
"The outlook for the remainder of2003 and for 2004 is robust, reflecting ourrecord backlog, our expertise at executing large program awards, our strong bid andproposal pipeline, and our proven ability to execute our business developmentinitiatives. Titan is on track to achieve a 28% organic revenue growth rate for FY2003." ... "The most significant driver of that growth is the expanding need formore, and increasingly sophisticated, C4ISR [command, control, communications,computers, intelligence, surveillance and reconnaissance] systems, products andservices, which is Titan's core competency,"
143. On February 23, 2004, the Company issued a press release entitled "Titan Reports
Record Fourth Quarter and Full Year 2003 Results Quarterly Revenues $488 million, up 29%; 2003
Revenues $1.78 billion, up 28% over 2002." The press release stated in relevant part that:
For full year 2003, Titan reported revenues of $1,775 million, an increase of28% over $1,392 million for the full year 2002. The organic growth rate for 2003was 26%. Results reflect record revenue growth for Titan driven by the Company'sability to bid, win, and execute on large procurements from the U.S. Department ofDefense and other government agencies in areas such as defense securecommunications and intelligence systems , government enterprise IT systems,transformational programs , and homeland security applications . Net income for thefourth quarter of2003 was $4.1 million , or $0.05 per share, compared with a net lossof $0.8 million or $0.01 per share for the fourth quarter of 2002.
144. Commenting on these results , defendant Ray stated:
"The record revenues and continued operating margin improvements thisquarter reflect our strong organic growth in providing National Security Solutions tothe U.S. Department ofDefense, Department ofHomeland Security and other federalagencies - as well as our continued efforts to improve operational efficiencies."
145. Defendants also provided the following additional details with regards to the FY03
results:
For full year 2003, Titan reported revenues of $1,775 million, an increase of28% over $1,392 million for the full year 2002. Net income was $32.1 million, or$0.38 per share, compared with a net loss of$271.5 million or $3.58 per share for thefull year 2002.
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F. Titan Reveals Investigations Into Possible Violations of the FCPA -But Denies the Veracity of the Allegations
146. On February 13, 2004, defendants issued a press release disclosing that the Company
had disclosed activities to the SEC and DOJ that could constitute FCPA violations. However,
defendants explicitly denied any wrongdoing. The press release, entitled "Titan Announces SEC
Investigation," stated in relevant part:
The Titan Corporation (NYSE: TTN) announced today that representatives ofLockheed Martin and Titan recently initiated meetings with the DOJ and theSecurities and Exchange Commission to advise of an internal review relating tocertain agreements between Titan and international consultants and related paymentsin foreign countries, Lockheed Martin and Titan have been informed that theSecurities and Exchange Commission has commenced an investigation into whetherpayments were made in violation of applicable law. Titan is not aware of anyunlawfulpayments by Titan and intends to cooperate fully with the government'sinvestigation.
Lockheed Martin has requested that Titan afford it access to all relevantinformation related to its relationships with international consultants so thatLockheed Martin may review that information in advance of the stockholders'meeting scheduled for March 16, 2004. Titan intends to cooperate fully withLockheed Martin in accordance with the terms of the parties' merger agreement.
147. The market reacted immediately to this disclosure of possible illegal payments in
foreign countries . Titan's stock dropped over $1.30 from $21.80 on February 12, 2004, to $20.49 on
February 13, 2004, trading over eight million shares compared to 235,000 shares the day before.
148. On March 5, 2004, Lockheed announced that the DOJ had opened a formal criminal
inquiry into whether Titan made illegal payments to foreign consultants in violation of the FCPA.
Lockheed and Titan issued separate press releases. Lockheed, growing impatient with the scandal
and signaling that it was considering walking away, stated that "[c] losing ofthe Titan transaction is
subject to approval of Titan's stockholders, the absence ofany material adverse change in Titan
and other conditions set forth in the merger agreement," while Titan's release only reflected that
"[c]losing of the proposed transaction is subject to approval of Titan's stockholders and other
conditions set forth in the merger agreement." Lockheed also told The Wall Street Journal that if
allegations of improper payments proved true, the actions could be in violation of the FCPA, and
that it was also investigating whether the payments themselves were accurately reflected in Titan's
financial reports.
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149. Lockheed's Form 10-K filed on March 8, 2004 describes the seriousness ofan FCPA
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I violation for Titan' s business as it would affect the merger with Lockheed:
Our review, the SEC investigation and the Department of Justice inquiry ofTitan may not be completed, or may not be conclusive, by the scheduled Titanstockholders' meeting date or the closing date.
In September 2003, we announced that we had entered into a mergeragreement to acquire The Titan Corporation. On February 13, 2004, LockheedMartin and Titan announced that representatives of both companies had initiatedmeetings with the Department of Justice and the SEC to advise of an internal reviewrelating to certain agreements between Titan and international consultants and relatedpayments in foreign countries. The SEC informed Lockheed Martin and Titan that ithas commenced an investigation into whether payments by Titan were made inviolation of applicable law. Lockheed Martin is independently reviewing Titan'spayments to international consultants to assess whether all conditions tothe closingof the proposed merger will be satisfied. Lockheed Martin has requested that Titanafford it access to all relevant information related to its relationships withinternational consultants so that the review maybe completed in advance ofthe Titanstockholders' meeting. Titan is cooperating with this request, as well as conductingits own review.
During the course of our review, we learned of allegations that improperpayments were made, or items of value were provided, by consultants for Titan or itssubsidiaries directly or indirectly to foreign officials. The alleged payments andprovision ofitems ofvalue, iftrue, raise questions concerning whether there has beena violation of the Foreign Corrupt Practices Act. We also are reviewing with Titanwhether payments made by Titan to consultants were accurately reflected on Titan'sbooks and records. Our review is ongoing. Together with Titan, we disclosed theallegations in a meeting with the SEC and the Department of Justice. During thatmeeting, Lockheed Martin and Titan were informed that the Department of Justicehas initiated a criminal inquiry into this matter.
The Titan stockholders' meeting for consideration of the merger is currentlyscheduled for March 16, 2004. It is possible that the results of the Titan andLockheed Martin internal reviews may not be completed by that date or may not beconclusive. In that instance, Lockheed Martin would need to determine whether theconditions to the merger have been satisfied . Moreover, even if the Titan andLockheed Martin reviews have been concluded prior to the date of the Titanstockholders' meeting, the SEC and the Department of Justice may not haveconcluded their investigations. If the government subsequently concludes thatunlawful payments were made by Titan, action could be taken against Titan orsome of its employees. These actions could include fines, penalties, criminalsanctions and limitations upon the ability of the affected Titan business orbusinesses to export products or enter into future U.S. Government contracts.
Closing ofthe Titan transaction is subject to approval ofTitan's stockholders,the absence of any material adverse change in Titan and other conditions set forth inthe merger agreement. Either Lockheed Martin or Titan may terminate the mergeragreement if the merger is not completed by March 31, 2004, provided that the partyseeking to terminate the agreement is not then in material breach of its obligationsunder the merger agreement in a manner that has contributed to the failure toconsummate the merger.
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150. The market reacted immediately to this news causing Titan's stock to drop from
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J $20.83 per share on March 5, 2004, to close at $19.11 per share on March 8, 2004, on a trading
11 volume of over six million shares comparedto 849,000 shares the day before.
G. Titan' s 2003 Form 10-K Contained Numerous False andMisleading Statements
151. On March 10, 2004, Titan filed its 2003 Form 10-K with the SEC. In this filing,
defendants reported $1.775 billion in revenues and net income of $29 million. Defendants also
reported net accounts receivables of $388 million. Defendants also made the following false
statements with regards to the particular accounts receivables associated with its Titan Wireless
project in Benin as follows:
Revenues for Titan Wireless were $71.5 million and net income was $1.0 million forthe year ended December 31, 2003.... The net income was primarily a result of thegain of$12.2 million from the disposition ofthe GlobalNet business.... The gain wasoffset by impairment charges of $10.8 million resulting from the terms of thesettlement agreements with Titan's customers in Nigeria and Benin, and byapproximately $5.0 million of charges accrued for the exit activities in Benin.
Related to Titan's contract with the OPT, [Benin] Titan has a S46.2 milliongross receivable due from the OPT, which is reflected in Current Assets ofDiscontinued Operations as of December 31, 2003. Of this amount, approximately$32.3 million is recorded as a receivable on the project, reflecting the outstandingbalance on the non-recourse loan, drawn to cover subcontract costs. The remaining$14 million net receivable represents amounts due from the OPT under the Titansettlement agreement entered into with the OPT. Titan entered into the settlementagreement with the OPT in October 2003 pursuant to which Titan was to be paid$29.5 million in full satisfaction of Titan's performance on the OPT contract, ofwhich $14 million remains outstanding as of December 31, 2003.
152. Titan's 2003 Form 10-K also contained the following misleading statement with
regards to the methods which Titan used to value long-lived assets:
Valuation of goodwill, intangible and other long-lived assets. We useassumptions in establishing the carrying value, fair value and estimated lives of ourlong-lived assets and goodwill.:.. Factors that would influence the likelihood of amaterial change in our reported results include significant changes in the asset'sability to generate positive cash flow, loss of legal ownership or title to the asset, asignificant decline in the economic and competitive environment on which the assetdepends ....
Titan's 2003 Form 10-K at 33. Titan violated these principles by improperly maintaining the value
of at least two Hewlett-Packard Superdome computers on Titan's books despite the fact that Titan
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had effectively transferred these computers to the Saudi Ministry of the Interior in 2002. Indeed,
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11 Titan eventually disclosed on the July 8, 2004 "Business Outlook" conference call that:
Item 4, a non-cash asset impairment charge of 20-25 million.... Theseimpairments pertain to two large computer systems purchased in 2000 and 2002.With one system supporting a program for US civilian government agencies. Andthe other for our business activities in Saudi Arabia....
On the other system in Saudi Arabia, given that we have decided to curtailour activities in a [sic] that marketplace, we expect. to not be able to recover ourinvestment in the computer systems.
153. Titan's 2003 Form 10-K also contained the following misleading statement with
regards to the SEC and DOJ investigation of Titan:
In relation to the current investigation by the SEC and Department ofJusticeinto whether payments involving foreign consultants were made in violation ofapplicable law, we may be required to pay certain liabilities in the future related tothis matter. The Company has recorded a $3 million provision as of December 31,2003, representing our estimate of potential liabilities related to this matter. Theultimate resolution ofthis matter is dependent upon the final results of such inquiriesand investigations and associated liabilities if any, could be different from theamount currently estimated.
I The 2003 Form 10-K was signed by defendants Ray, Sopp, and Lund.
154. Then, on March 22, 2004, The Wall Street Journal shocked the investment
community by breaking a story disclosing that internally Titan officials were in possession of
evidence that Titan made potentially illegal payments to foreign officials totaling millions ofdollars
while competing for contracts in Africa, the Middle East and Asia, citing a person familiar with the
inquiry. The Wall Street Journal also revealed that the discovery had led to the suspension ofa mid-
level employee at one of Titan's units and that Titan had entered into negotiations for a possible plea
agreement with the DOJ. Director Joseph Caligiuri told Bloomberg reporter, Edmond Lococo, that a
special committee led by Titan board member Robert Hanisee, has been investigating the payments
and completed most of the work last week, and were considering with the DOJ a guilty plea that
consultants for Titan had made improper payments to foreign officials.
155. A subsequent article run by the TheLos Angeles Times on March 23, 2004, entitled
I "Plea May Be Key to Buyout of Titan," explained that public disclosure of the payments and the
illegality had spooked Lockheed and stated in relevant part:
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1 Lockheed, which agreed to buy Titan in September, is thought reluctant tocomplete the deal unless Titan can clear itself of potential criminal indictment
2 stemming from the investigations, said sources who asked not to be identified.
3 The companies also are approaching an April 20 deadline for completing thepurchase. Thus, Titan might accept a plea agreement to quickly settle the
4 investigations and allow the deal to proceed, sources said . Titan already has said itset aside $3 million to pay possible fines.
5The potential Titan violations ofthe U.S. Foreign Corrupt Practices Act were
6 uncovered during internal reviews by both companies, which reported their findingsto government officials.
7But a plea agreement still might not be enough to get the transaction
8 completed, sources said.
9 Even if a plea is entered, Lockheed Martin, the Bethesda, Md. -baseddefense giant, might then demand that the terms ofits buyout offer be amended to
10 reflect Titan 'sfines and any damage Titan suffers to its reputation andits ability tosecure government contracts, sources said. Depending on how much Lockheed
11 alters those terms, Titan's management and stockholders might then have toreconsider approval of the merger. Lockheed also would have to quickly get the
12 revised terms to Titan's stockholders before April 12, when they are scheduled tovote on the buyout.
13156. According to the The Los Angeles Times article, on this news "Titan's stock fell 43
14cents to $19.73 a share Monday, while Lockheed Martin rose 41 cents to $44.51."
15157. On March 31, 2004, Titan spokesperson, Wil Williams, told the press, as reported by
16The San Diego Union-Tribune on April 1, 2004: "Titan does not believe, based on the facts that we
17know today, that there has been any material adverse change" that would cause Lockheed to cancel
18the deal.
19158. On April 7, 2004, Lockheed and Titan jointly issued a press release entitled
20"Lockheed Martin and Titan Announce Amended Merger Agreement; Titan Anticipates June 7,
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222004 Stockholder Meeting" announcing that Lockheed renegotiated its deal to buy Titan, lowering
its bid by $200 million and pushing back the merger's closing date as Titan dealt with federal23
24investigations into whether its consultants bribed foreign officials. While Lockheed originally
25agreed to pay $2.4 billion in cash, stock and assumption of debt for the San Diego-based company,
the renegotiated price totaled $2.2 billion, or roughly $20 in cash for each Titan share, and would no26
longer include an exchange of stock. Also, while shareholders of Titan originally were scheduled to27
28vote on the deal March 16, the date was pushed back once last month, and the acquisition was now
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scheduled for a vote on or after June 7. The closing date had been pushed back from the original
date of March 31 to June 25, but it might extend as late as September 24. As a condition of closing
the merger, Titan was now required to provide written confirmation either that the DOJ allegations
had been resolved and it did not intend to pursue any claims against Titan, or that Titan had entered
into a plea agreement and completed the sentencing process. The press release stated, in relevant
part:
Lockheed Martin Corporation (NYSE: LMT) and The Titan Corporation (NYSE:TTN) announced today that they have amended their merger agreement. Under theterms of the amended agreement, Titan stockholders will receive $20 in cash inexchange for each Titan share owned.
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As previously announced, Lockheed Martin and Titan have been conductingreviews of whether payments were made, or items of value were provided, byconsultants for Titan or its subsidiaries to foreign officials. These internal reviewsare substantially complete. The Securities and Exchange Commission (SEC) alsocommenced an investigation into whether payments involving Titan's internationalconsultants were made in violation of applicable law. In addition, the DOJ initiated acriminal inquiry into this matter. As part of their reviews, Lockheed Martin, Titan,the SEC and the DOJ have been evaluating Titan's internal controls relating to thesematters.
The merger agreement also has been amended to provide that, as a conditionto the closing of the transaction, Titan must obtain written confirmation that theDOJ considers its investigation of these allegations resolved and does not intend topursue any claims against Titan, or Titan must have entered into a plea agreementwith the DOJ and completed the sentencing process. Upon satisfaction of thiscondition, Lockheed Martin has agreed that the facts surrounding these allegationsand the related proceedings, costs and expenses will not constitute a material adverseeffect on Titan.
In light of the amendments to the merger agreement, Titan will not considerthe merger at the special meeting of its stockholders scheduled to be reconvened onApril 12, 2004. Titan intends to establish a new record date for the determination ofthe Titan stockholders who are entitled to vote on the amended merger agreementand plans to prepare and distribute new proxy materials to these record holders assoon as they are available, in anticipation of a new special meeting to be held on orafter June 7, 2004. The revised merger agreement provides that if the merger is notcompleted on or before June 25, 2004, either Lockheed Martin or Titan mayterminate the merger agreement, provided that the party seeking to terminate theagreement is not then in material breach of its obligations under the mergeragreement in a manner that has contributed to the failure to complete the merger bysuch date. Under certain limited circumstances, the date may be extended to a dateas late as September 24, 2004.
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1 H. Titan Issues Further False or Misleading Financials for 1Q04and Omits Impact of Violations of the FCPA and GAAP
2159. On May 3, 2004, Titan reported financial results for I Q04. In the press release,
3defendants reported revenues of$459 million for the I Q04, a 21 % increase over revenues of $378
4million for the same period a year ago. The year-over-year growth rate in the first quarter was also
521%. Net income for 1Q04 was $3.1 million, or $0.03 per diluted share, compared with net income
6of $7.0 million, or $0.09 per diluted share, for 1Q03. The release also stated that:
7Receivables growth during the quarter was largely the result of longer
8 payment cycles on certain contracts and a customer-mandated temporary changefrom electronic billing to manual billing for Titan's largest contract. As a result,
9 Days Sales Outstanding (DSO) grew to 84 days at March 31, 2004, from 72 days atDecember 31, 2003. Titan believes this DSO growth is temporary, and that more
14 normalized payment cycles will be restored in the second and third quarters of2004,thereby resulting in reductions of both DSO and outstanding bank debt.
11160. Commenting on the results, defendant Ray stated:
12"This quarter marks the fourth quarter in a row where Titan's organic revenue
13 growth has exceeded 20% over the comparable prior year period." ... "Ouremployees remained focused on providing and expanding the vital services we
14 deliver to key national security customers. Compared with the first quarter of lastyear, we increased revenues and continued to build backlog, laying the foundation
15 for strong future business growth."
16 161. On May 10, 2004, Titan filed its Report on Form 10-Q for 1 Q04. The report was
17 signed by defendants Ray and Sopp and reaffirmed the Company's previously issued financial
18 results. The defendants also represented the following:
19 The accompanying financial information includes substantially all subsidiaries on aconsolidated basis and all normal recurring adjustments which are considered
20 necessary by the Company's management for a fair presentation of the financialposition, results of operations and cash flows for the periods presented.
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22In the three months ended March 31, 2004, Titan incurred approximately
23 $17.6 million in legal, investment banking, accounting, printing and otherprofessional fees and costs related to the planned merger, which are reflected as
24 merger-related costs in the accompanying consolidated income statements.Approximately $11.9 million ofthese costs were associated with the comprehensive
25 internal review being conducted by Titan to evaluate whetherpayments involvinginternational consultants for Titan or its subsidiaries were made in violation of
26 applicable law. The legal, accounting and other professional fees incurred alsosupported the related inquiry by the DOJ and the investigation by the Securities and
27 Exchange Commission (see Note 7).
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1. The Merger Crumbles as Titan Fails to Resolve the Investigations
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162. On June 4, 2004, Titan announced it had received a "Wells Notice" from the staffof
the SEC in connection with the previously announced SEC investigation regarding certain payments
to foreign countries . The "Wells Notice" notified Titan that the SEC staff intends to recommend that
I the SEC bring a civil action against Titan for alleged violations of U.S. securities laws.
163. On June 7, 2004, Titan announced that a majority of its stockholders adopted the
I merger agreement and approved the. proposed merger with Lockheed.
164. On June 23, 2004, Wachovia Securities ("Wachovia") announced that they were
lowering their investment rating to "Underperform" from "Market Perform" as they had become less
comfortable that Titan would reach a plea agreement with the DOJ regarding the FCPA inquiry
before Lockheed's Friday, June 25 drop-dead date. Wachovia reported that the announcement of an
agreement was necessary, or Lockheed indicated it would walk away from its $20 per share cash
offer and pay the $60 million break-up fee. Wachovia also stated that "[i]f [Titan] remains
independent; they will need to rebuild some management capability," citing the loss ofseveral senior
managers.
165. On June 24 , 2004, a few minutes before the market closed, trading in shares of Titan
I and Lockheed was halted on the New York Stock Exchange pending an announcement. Thereafter,
Titan announced that Lockheed was not willing to give Titan more time to settle the FCPA
violations with the government.
San Diego, CA -- June 24, 2004 -- The Titan Corporation (NYSE: TTN)announced today that it has been informed by Lockheed Martin Corporation (NYSE:LMT) that it is unwilling to extend the June 25, 2004 date by which Titan mustsecure a definitive plea agreement relating to alleged violations of the ForeignCorrupt Practices Act. Reaching a definitive plea agreement by June 25, 2004 isrequired in order to avoid triggering termination rights under the merger agreement.Titan also announced that, based on information receivedfrom the government byboth Titan and Lockheed Martin, it does not expect that a definitiveplea agreementcan be finalized and signed by that date. Accordingly, Titan does not believe that adefinitive plea agreement or a further amendment to the merger agreement will bedelivered on or before June 25 , 2004, and that therefore either party will have theright to terminate the merger agreement after June 25, 2004, provided that the partyelecting to terminate has not breached in any material respect its obligations underthe merger agreement in any manner that has contributed to the failure toconsummate the merger on or before June 25, 2004.
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Titan has not received any indication from Lockheed Martin concerningwhether or not it will terminate the merger agreement after June 25, 2004 if adefinitive plea agreement has not been secured on or before that date.
166. Three-and-a-half hours later, Bloomberg reporter Edmond Lococo issued an article
':1 entitled "Titan Shares May Drop 40% With Collapse of Sale to Lockheed." Lococo also stated:
Lingering Questions.
The breakdown of the transaction leaves Titan investors with lingeringquestions, starting with how the Justice Department probe will ultimately beresolved, Jordan said.
In March, Titan said it established a $3 million reserve to cover potentialfines from the bribery probe. Yesterday's statement made no mention of whetherthat reserve would still be adequate.
167. Titan shares the next day, Friday, June 25, 2004, lost 22% of their value as investors
feared Lockheed would call off the deal and The Wall Street Journal reported:
Lockheed-Titan Deal Appears To Collapse as Deadline Looms
After a tortuous path, Lockheed Martin Corp.'s $1.66 billion acquisition ofTitan Corp. appeared to collapse when Titan announced that it doesn't expect toreach a pica agreement by today's deadline to resolve a Justice Departmentinvestigation into alleged overseas bribery.
The development surprised investors, who for weeks had received signalsfrom both companies that a settlement was forthcoming. In a statement, however,Titan said that "it does not expect that a definitive plea agreement can be finalizedand signed" by the June 25 deadline.
It was unclear what triggered the breakdown of a plea agreement with thegovernment. Under a proposed settlement, the Justice Department was demandingthat Titan or some of its subsidiaries plead guilty to multiple felony counts and payfines and penalties that are substantially higher than the $3 million the company hasset aside, according to people familiar with the situation.
168. On June 26, 2004, Lockheed terminated the merger and stated in a press release:
Lockheed Martin Corporation (NYSE: LMT) announced that it has terminated themerger agreement with The Titan Corporation because Titan did not satisfy all theclosing conditions on or before June 25, 2004. Under the terms of the amendedmerger agreement, either party could terminate the merger agreement if Titan either(i) had not obtained written confirmation from the Department of Justice that theinvestigation of alleged Foreign Corrupt Practices Act (FCPA) violations wasresolved as to Titan and the Department did not intend to pursue any claims against
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1 Titan; or (ii) Titan had not entered into a plea agreement on or prior to June 25, 2004,provided that the terminating party had not contributed to the failure to consummate
2 the merger through a breach of its obligations in any material respect. Titan did notsatisfy either requirement.
3The merger agreement was entered into on September 15, 2003, and was
4 amended twice to provide additional time for Titan to resolve FCPA concerns withthe U.S. Government. The corporation declined Titan's request for a further
5 extension.
6 169. On June 27, 2004, Bloomberg reported that The Wall Street Journal wrote:
7 After years oftransactions, Titan was set early this year to make its climacticdeal, the sale of itself to Lockheed Martin Corp. But the $1.6 billion sale imploded
8 bitterly over the weekend because of an unresolved bribery investigation involvingoperations that Titan recently took on in its push to expand.
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10After being investigated for months over possible bribery by consultants
11 Titan employed abroad, the company failed to reach a plea deal with the JusticeDepartment by a Friday deadline that Titan and Lockheed Martin had set. Lockheed,
12 having postponed the closing twice, refused a further extension, and on Saturday itformally terminated the merger plan.
13A proposed Titan settlement in the range of$30 million -- one ofthe biggest
14 Foreign Corrupt Practices Act penalties ever -- was in advanced stages, peoplefamiliar with the Justice Department talks say....
15170. The impact of Titan's illegal conduct and its failure to reach a settlement is well
16known to the investment community as well as Titan. In Titan's June 30, 2004 Form 10-Q filed on
17August 9, 2004, Titan stated:
18Both prior to and since the termination of the merger agreement with
19 Lockheed Martin, Titan has had settlement discussions with the SEC and the DOJ. Ifsettlement discussions fail, and the government determines that unlawful payments
20 were made, the government could take action against Titan and/or some of itsemployees. These actions could include criminal and civilfines, penalties, criminal
21 sanctions and limitations on Titan's ability to exportproducts or enter intofutureU.S. government contracts.
22171. On June 30, 2004, Edmond Lococo ofBloomberg also commented on Titan's risk of
23not receiving future government contracts after Lockheed had backed out of the merger:
24Titan still has an incentive to settle the case to avoid a trial and the risk of
25 being barred from future government contracts, one penalty allowed under theForeign Corrupt Practices Act, said Gourley, who handles cases involving the act but
26 isn't involved with Titan.
27 172. Indeed, an FCPA violation for Titan came at the worst possible time just when the
28 Pentagon was spending massive amounts of money on the war on terrorism. The New York Post
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reported on May 12, 2004 that private contractors , like Titan, "are getting at least 30 cents out of
every dollar spent on the war against terror." Moreover, Deborah Avant, a professor at George
Washington University and specialist in Pentagon contracting, says the figure may actually be a
conservative estimate.
173. On June 28, 2004, Standard & Poor's Ratings Services (the "S&P") issued a press
release stating it revised its CreditWatch listing on Titan to negative from developing , following
Lockheed's decision to terminate its $2.2 billion deal to acquire Titan. The S&P press release stated:
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Standard & Poor's will continue to monitor the ongoing Justice Departmentprobe, in addition to a civil case that the SEC has notified Titan it will likely bringagainst the company, and will re-evaluate its ratings and determine the impact, ifany,the probe could have on Titan's business practices and financial profile. ,
174. On July 1, 2004, Moody's placed Titan on review for possible downgrade and issued
the following press release stating:
Moody's has placed The Titan Corporation ("Titan") on review for possibledowngrade to reflect concerns about its reputation and cash flowfrom the impact ofthe company's alleged violation ofprovisions set forth in the Foreign PracticesCorrupt Act. Increases in accounts receivable since December 31, 2003 along withother business issues will also be explored during the review. The decision to placethe company on review for possible downgrade considers the announcement byLockheed Martin to terminate its merger with Titan.
In its review for possible downgrade, Moody's will focus on the liquidity andcash flow effects of the alleged violation by Titan of provisions in the ForeignPractices Corrupt Act. Moody's will also consider the likely potential outcomes andattempt to quantify their effects on the company's reputation, business renewal rates,contract win rate, possible contract losses , and related working capital changes.
According to some press reports, the company was discussing a settlementwith the Department of Justice (DOJ) and the Securities and Exchange Commission(SEC) in the area of $30 million subject to approval by Lockheed Martin. Expensesrelated to the termination of acquisition plans by Lockheed Martin have not beendetermined, but may also have an impact on the company's debt levels and workingcapital needs. Changes in the company's product offerings may include a reducedemphasis on international contracts and will need to be reviewed in order tounderstand their impact on revenue growth and on the company's overallcompetitiveness'for certain contracts. In the first quarter of 2004, Titan reported thatits accounts receivable had increased to 5427.5 million from $388 million at the endof 2003.
175. Titan' s stock plummeted on the news of Titan's inability to settle the FCPA
investigation and complete the merger with Lockheed, projecting that the violations had credibility
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and were worse than let on by Titan . The shares fell from a 12-month high of $21.99 and failed to
regain ground , closing Wednesday, August 28, 2004, at S 12.98 . According to a San Diego Union-
Tribune report , financial analysts indicated concern about Titan ' s financial prospects . "Analyst
Adam Weiner of Credit Suisse First Boston took a similar view," the Union -Tribune said , "writing
that `lingering uncertainty ' surrounding the federal inquiry and Titan ' s 'management distractions'
raised questions about the company ' s performance . But Weiner saw room for optimism ifTitan can
settle the federal investigations and show that its operations are indeed stabilized . ` There remains
the possibility that another suitor for Titan emerges at some point , particularly if pending federal
investigations are resolved and a credible earnings outlook restored ,' Weiner wrote."
J. Post-Class Period Revelations About Titan
176. On July 1, 2004, defendants tried to prevent further hemorrhaging in the Company's
stock by announcing a July 8, 2004 conference call to discuss Titan's 2004 business outlook. Titan's
press release stated:
The Titan Corporation (NYSE: TTN) announced today that Gene W. Ray, chairman,president and chief executive officer, and Mark W. Sopp, senior vice president andchief financial officer, will host a conference call and Q&A session with theinvestment community on Thursday, July 8, 2004 at approximately 4:45 p.m. EDT todiscuss preliminary financial and operating results for the second quarter ended June30, 2004.
Titan management will also address the following areas:
• strategic direction following the termination of its merger agreementwith Lockheed Martin Corp. (NYSE: LMT) on June 26, 2004;
• the benefits ofTitan 's increasing focus on providing national securitysolutions;
• the high retention rate of its senior operating officers and other keyemployees during the pending merger and after its termination;
• business growth prospects in the company' s core operations;
• the ongoing Foreign Corrupt Practices Act (FCPA) governmentinvestigations; and
• strategic decisions for Titan' s non-core operations and relatedfinancial charges in Q2'04.
"Titan's business has shown excellent growth during the last several months,notwithstanding the significant diversion ofmanagement ' s attention to the proposedmerger and government investigations," said Ray.
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177. On July 8 , 2004, defendants issued a press release reporting the financial results for
2Q04 and revealed , for the first time, write-offs and losses associated with the divisions and
companies embroiled in the illegal and improper practices being investigated:
The Titan Corporation (NYSE: TTN) today announced preliminary financial resultsfor the second quarter ended June 30, 2004 ....
Projections for the company' s net loss for the quarter and net loss per shareinclude certain expected charges that have not yet been finally determined. Theestimated range ofthe net loss is expected to be $62-$78 million , or $0.74-$0.93 pershare , comprised of the following anticipated results and charges:
• Net loss from continuing operations of $27-$ 38 million,which includes:
• Operating profit of $33-$35 million , before merger-related costs , government investigation costs andreserves, asset impairments , and interest expense;
• Merger-related and government investigation costsincurred of approximately $ 8-$9 million;
• Accruals of reserves relating to the estimatedadditional costs to reach resolution with thegovernment on the Foreign Corrupt Practices Act(FCPA) investigations of $26-$32 million, which arenot expected to be tax deductible; and
• Asset impairment charges within continuingoperations of $20-$25 million;
• Interest expense of approximately $9 million;
• An estimated tax provision on the operating profitabove at an effective rate of 40%; and an estimatedtax benefit on the merger-related and governmentinvestigation costs, asset impairment charges, andinterest expense items above at an effective 40% taxrate.
• Loss on Discontinued Operations (net of tax) of approximately $35-$40 million.
* *
As previously disclosed, Titan had reserved $3 million as of December 31,2003 for resolution of the government FCPA investigations. Titan now estimatesthe incremental cost to resolve this matter with the government will be $26-$32million . The company is continuing to cooperate fully with the government toresolve the investigations. The actual provision to be recorded in the second quarterwill be determined at the time final earnings are released in early August.
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The operating loss for the second quarter of 2004 is also expected to reflectapproximately $20-$25 million in asset impairment charges. Approximately halfof these charges pertain to impairment offixed assets directly related to thetermination ofa program by a civilian government agency in the second quarter,and a reduction in scope ofplanned business activities in Saudi Arabia.
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Titan also announced today that it has put up for sale its non-core DatronWorld Communications business and its Titan Scan Technologies service business.Titan expects to record after-tax charges in discontinued operations ofapproximately $24-$28 million in the second quarter of2004 related to the disposalofthese two businesses . The charges are comprised of approximately $18 million ofnon-deductible impaired intangible assets, mostlygoodwill, andfixed asset valuesnot expected to be recovered in the disposal ofthese businesses.
Titan also expects to record a charge ofapproximately $11 million, after-tax, pertaining to our discontinued Titan Wireless activities in Benin, Africa. Thischarge, principally the result of the Benin customer's cash flow deficiencies andinability to obtain adequate financing, represents afull allowancefor the remainingamount ofthepast-due $14.5 million receivable on the underlying Benin contract,plus an additional $4 million accrual related to a contingent liability associatedwith a subcontractor on this project.
178. On August 4, 2004, Titan issued its earnings release for the second quarter confirming
these write-downs and losses related to the divisions and entities involved in the investigations and
improper or illegal practices. The release stated:
The company reported a net loss of $66. 6 million , or $(0.79) per share, forthe second quarter of 2004 compared with net income of $5.9 million, or $0.07 perdiluted share, for the second quarter of 2003. Included in the net income for thesecond quarter of2003 was a charge of$12.4 millionfor debt extinguishment costsand a loss from discontinued operations of $0.8 million . Titan's net loss for thesecond quarter of 2004, which was within the range projected in the company'spreliminary second quarter 2004 results announced on July 8, 2004, was comprisedof the following:
Operating profit , before merger-related costs,government investigation and settlement costs,and asset impairmentsMerger, investigation & settlement costsImpairment of assetsGAAP operating lossInterest expense, netNet loss from continuing operations (pre-tax)Income tax benefitNet loss from continuing operationsNet loss from discontinued operations (after tax)Net loss available to common shareholders
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($thousands)
$33,920
$34,332$22,695
$(23,107)$8,918
$(32,025)$2,596
$(29,429)$(37,123)$(66,552)
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Operating profit for the second quarter of 2004 was adversely affected byapproximately $5 million in losses resulting from Titan's National ID Card systemcontract in Saudi Arabia. Selling, general and administrative expenses were 7.4% ofrevenues in the second quarter of 2004 compared with 8.8% of revenues in thecomparable prior-year period....
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As previously disclosed, Titan had reserved $3 million as of December 31,2003 for resolution of the government Foreign Corrupt Practices Act (FCPA)investigations . Titan recorded an additional provision in the second quarter of 2004of $25. 5 million for anticipated settlement costs , and $8 . 8 million in merger andgovernment investigation-related expenses, mostly legal costs , incurred during thequarter. The company did not accrue for future legal costs expected to be incurred toreach resolution of the FCPA matter ; those costs will be expensed as incurred infuture periods . Titan is continuing to cooperate fully with the government to resolvethe investigations.
The operating loss for the second quarter of2004 also included $22. 7 millionin asset impairment charges. Approximately half of these charges pertain toimpairment offixed assets directly related to the termination ofa program by acivilian government agency in the second quarter, and impairment of assetsassociated with a reduction in scope ofplanned business activities in Saudi Arabia.
As previously announced on July 8, 2004, Titan has offered for sale its non-core Datron World Communications business and its Titan Scan Technologiesservice business. The company recorded an aggregate after-tax loss in discontinuedoperations of $24. 6 million in the second quarter of 2004 related to these twobusinesses. The loss is primarily comprised of the impairment of intangible assets,mostly goodwill, and fixed asset values not expected to be recovered in the disposalof these businesses.
Titan also recorded an aggregate after-tax loss of$11.9 million pertaining toits discontinued Titan Wireless activities in Benin, Africa. This loss includes a fullallowance for the remaining amount ofthe past-due $14.4 million receivable on theunderlying Benin contract, a $2.3 million after-taxprovision related to a contingentliability associated with a subcontractor on this project, and administrative andlegal costs related to this operation.
179. These write-downs and losses related to the entities involved in the corrupt and
improper practices which allowed Titan to inflate its revenues and earnings prior to and during the
Class Period, and prior to negotiations with Lockheed for a merger, which, in part allowed Titan to
show an earnings profit ofover $6 million for the quarter ending June 30, 2004 and over $15 million
for the six months ending June 30, 2004, were confirmed in Titan's quarterly Report on Form 10-Q
filed with the SEC on August 9, 2004.
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K. Basis that Statements Were False or Contained Material Omissions
180. Defendants ' misconduct throughout the Class Period was designed to perpetuate the
perception ofTitan as a company that was poised for continued growth and whose stock would soon
be acquired by Lockheed at a substantial premium to its pre-merger announcement trading price.
The statements made by defendants during the Class Period were each false and misleading when
made. The true facts , known only to defendants , were that by means of defendants ' undisclosed,
improper and illicit practices set forth in §IV.D, Titan and defendants:
(a) Inappropriately inflated revenue and accounts receivables, and failed to timely
write-off assets , in violation of GAAP (see §V.L.);
(b) Violated the FCPA, in violation of 15 U. S.C. §§78dd- l, et seq ., and Titan's
own publicly stated Code of Ethics ostensibly designed to assure the investment community that
Titan would not violate these laws;
(c) Made Titan's financial results look better than they actually were prior to and
during the Class Period;
(d) Exposed Titan to huge civil and criminal penalties for its unlawful conduct,
the potential liability of which was not adequately reserved for or disclosed in the Company's
audited financial statements;
(e) Successfully negotiated a merger with Lockheed on favorable terms and keep
Lockheed bound to the merger contract through the end of the Class Period; and
(f) Falsely denied of any illegal or wrongful conduct.
L. Defendants ' Conduct Violated GAAP and SEC Rules and Regulations
1. Inadequate Disclosure in Titan ' s SEC Filings
181. Titan improperly failed to disclose that it was able to obtain certain revenue only as a
result of engaging in bribery. When revenue is derived from an illegal act that is considered material
in relation to the financial statements, this information should be disclosed. See Kicso &
Weygandt'sIntermediate Accounting. Further, Generally Accepted Auditing Standards ("GAAS")
alert auditors and accountants to illegal acts and the need for disclosure. See Statement on Auditing
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Standards ("SAS") No. 54, Illegal Acts by Clients. Illegal acts encompass such items as illegal
political contributions, bribes, kickbacks and other violations of laws and regulations. Id.
a. Inadequate Disclosure in Titan'sManagement' s Discussion and Analysis Section of theForm 10-K
182. Specifically, Titan failed to disclose that it was able to obtain certain revenue only as
a result ofengaging in bribery. The overall objective in the Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD&A") section ofthe SEC filing is to provide
investors with the information needed to assess the financial condition and results of operations of
the registrant. Further, the disclosures are designed, without limitation, to allow investors to view
the business through the eyes of management. See SEC Release 33-6834, SEC Interpretation:
Management's Discussion and Analysis ofFinancial Condition and Results of Operations; Certain
Investment Company Disclosures, of May 18, 1989. Item 303 of Regulation S-K requires specific
disclosures including any known trends or uncertainties that are reasonably likely to impact the
company's liquidity, and any unusual or infrequent events or transactions or any significant
economic changes that materially affected the amount of reported income from continuing
operations and in each case, indicate the extent to which income was so affected. Therefore, the
MD&A sections of Titan's SEC filings should have discussed the illegal bribes used to induce
foreign governments to sign contracts with Titan.
b. Inadequate Footnote Disclosure
183. Additionally, Titan failed to disclose its bribes in the financial footnotes of its SEC
filings. AICPA Statement of Position ("SOP") 94-6, Disclosure of Certain Significant Risks and
Uncertainties, requires disclosure of a wide variety of information in the footnotes to the financial
statements, but it primarily focuses on the "risks and uncertainties that could significantly affect the
amounts reported in the financial statements in the near term or the near-term functioning of the
reporting entity." See SOP 94-6, ¶2. Specifically, SOP 94-6 was issued in December 1994 and
concluded that:
[R]eporting entities should make disclosures in their financial statements beyondthose now required or generally made in financial statements about the risks and
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uncertainties existing as of the date of those financial statements in the followingareas:
a. Nature of operation
b. Use of estimates in the preparation of financial statements
c. Certain significant estimates
d. Current vulnerability due to certain concentrations
See SOP 94-6,18.
2. Titan ' s Bribes and Resulting Revenue Were Material
184. The bribes and the resulting revenue Titan recognized were material . GAAP affirms,
"[t]he omission or misstatement of an item in a financial report is material if, in the light of
surrounding circumstances, the magnitude ofthe item is such that it is probable that the judgment of
a reasonable person relying upon the report would have been changed or influenced by the inclusion
or correction of the item." See Statement of Financial Accounting Concepts ("FASCON") No. 2,
Qualitative Characteristics ofAccountinglnformation, ¶132 and StaffAccounting Bulletin ("SAB")
No. 99, Materiality.
185. SAB No. 99 goes on further to specifically state that one consideration that may well
render material a quantitatively small misstatement (or omission) of a financial statement item is
"whether the misstatement involves concealment of an unlawful transaction."
186. Similarly, FASCON No. 2, ¶128d states, "[a]mounts too small to warrant disclosure
or correction in normal circumstances may be considered material if they arise from abnormal or
unusual transactions or events." Illegal bribes certainly fall under the category of "abnormal or
I unusual" and, thus, are material and require disclosure.
3. Titan Inappropriately Inflated Revenue and AccountsReceivables
187. As described in ¶171-80, 91-102 and 107-110, Titan improperly recognized revenue
when it knew that collectability of the receivable was not "reasonably assured." For example, in
Benin, Titan had by late 2002 allegedly given up on rccovcring over $25 million of the debt, had
received little or no payments and had no basis for expending any additional payments except by the
provision of additional bribes. ¶171-75.
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188. GAAP, as described by FASCON No. 5, provides the basic requirements for revenue
to be recognized : (a) revenue must have been earned ; and (b) revenue must be realizable
(collectible). See FASCON No. 5, J83.
189. Additionally , the SEC has issued SAB No. 101,1 which summarizes the SEC's views
in applying GAAP, including FASCON No. 5, to revenue recognition in financial statements. SAB
No. 101 states that revenue is generally realized or realizable and earned when all of the following
II criteria are met:
• Persuasive evidence of an arrangement exists;
• Delivery has occurred or services have been rendered;
• The seller' s price to the buyer is fixed or determinable; and
• Collectibility is reasonably assured.
See SAB No. 101.
190. Further, notwithstanding the fact that uncollectible revenue should not have been
recognized in the first place, Titan failed to subsequently establish sufficient receivable reserves.
191. Titan was required by GAAP to record reserves for the receivables that were probably
I uncollectible.
An estimated loss from a loss contingency [e.g., collectibility of receivables] ...shallbe accrued by a charge to income if both of the following conditions are met:
a. Information available prior to issuance of the financial statementsindicates that it is probable that an asset had been impaired or a liability had beenincurred at the date of the financial statements...,
b. The amount of loss can be reasonably estimated."
See FASCON No. 5,114, 8.
192. Ultimately, during 2Q04 Titan recorded a $14.351 million reserve on its accounts
receivables associated with the Benin contract.
On May 9, 2003, the SEC issued SAB No. 103 which codified SAB No. 101. On December17, 2003, the SEC issued SAB No. 104 which revises and rescinds portions of Topic 13, RevenueRecognition , of SAB No. 103 (i. e., SAB No. 101). However, the SEC's view, noted above, on whenrevenue is generally realizable and earned did not change.
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4. Defendants Failed to Write-Off Impaired Assets
193. As described in ¶88, Titan failed to write-off its impaired fixed assets in a timely
manner in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires
companies to recognize an impairment loss in the period in which an asset becomes impaired. See
SFAS No, 144,117-26. Ultimately in 2Q04, Titan wrote-off $22.7 of impaired assets.
194. Additionally, as described in ¶¶12 and 110, Titan also failed to write-off its impaired
goodwill in a timely manner in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. According to Titan's SEC filings, Titan adopted the provisions of SFAS No. 142 effective
January 1, 2002. This standard requires companies to cease amortizing goodwill and instead review
goodwill and other tangible assets for impairment upon adoption of SFAS No. 142 and at least once
annually thereafter. Titan's annual testing is performed in the first quarter of each year. Goodwill
must also be tested between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying value on the books. SFAS
No. 142, ¶28.
195. Ultimately, Titan recorded an aggregate after-tax loss in discontinued operations of
$24.6 million in 2Q04, primarily related to impaired goodwill. This should have been written off at
least one quarter sooner during Titan's annual review of goodwill in light ofthe fact that Titan knew
the customs problems and the risk of not getting paid.
5. Vendor Consideration (Including Bribes)
196. Titan was required to account for its illegal bribes as a reduction to revenue. "[C]ash
consideration (including a sales incentive) given by a vendor to a customer is presumed to be a
reduction of the selling prices of the vendor's products or services and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's income statement." See
Emerging Issues Task Force ("EITF") Issue No. 01-9, Accountingfor Consideration Given by a
Vendor to a Customer, ¶9. As described in ¶67, Titan actively credited phony invoices of non-
performed work so as to recognize revenue on the bribes made to Karicom.
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VI. SCIENTER
197. In addition to defendants' direct knowledge of the improper, illegal or corrupt
practices set forth above, facts strongly infer Titan and the Individual Defendants had motive to
4 I commit the fraud or to continue to hide the material facts, and their knowledge of these practices.
A. Motive Caused by the Need for Cash if Titan Were to Continueto Grow by Acquisition
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198. When in the spring of 2003 Titan began to seriously consider selling itself to a
potential suitor, the Company's business plan was to continue to grow by acquisition. But with
Titan's financial position, and its meager profits it was unlikely that Titan could continue this course
without an infusion of cash. Titan stated in its December 31, 2002 Form 10-K:
Our strategic goals include the continued funding of acquisitions andcapital expenditures . We plan to finance these requirements from a combination ofsources, which include cash generation from our core businesses, our credit facilityand potential cash generated from the disposal of discontinued businesses.Management believes that the combination of our existing cash, amounts availableunder our credit facility and cash flow expected to be generated from our operationswill be sufficient to fund planned investments and working capital requirements forat least the next twelve months . However, we could elect, or we could be required,to raise additionalfunds during that period and we may need to raise additionalcapital in thefuture. Additional capital may not be available at all, or may not beavailable on terms favorable to us. Any additional issuance of equity or equity-linked securities may result in substantial dilution to our stockholders.Management is continually monitoring and reevaluating its level ofinvestment inall ofits operations and thefinancing sources available to achieve our goals.
199. Titan reiterated this risk as it was actively negotiating with Lockheed and others to be
I purchased . Titan stated in its June 30, 2003 Form 10-Q:
Management believes that the combination of our existing cash, amounts availableunder our credit facility and cash flow expected to be generated from our operationswill be sufficient to fund planned investments and working capital requirements forat least the next twelve months. However, we could elect, or we could be required,to raise additionalfunds during that period and we may need to raise additionalcapital in thefuture. Additional capital may not be available at all, or may not beavailable on terms favorable to us. Any additional issuance of equity or equity-linked securities may result in substantial dilution to our stockholders.Management is continually monitoring and reevaluating its level ofinvestment inall ofits operations and thefinancing sources available to achieve our goals.
200. After Titan and Lockheed reached an agreement, Titan continued to warn ofthis risk
if the deal did not go through. Titan stated in its September 30, 2003 Form 10-Q:
Management believes that the combination ofour existing cash , amounts availableunder our credit facility and cash flow expected to be generated from our operations
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will be sufficient to fund planned investments, the planned redemption of thepreferred stock and working capital requirements for at least the next twelve monthsif the pending merger with Lockheed Martin is not consummated. Under the mergeragreement, we are prohibited from raising additional capital. Should the merger bedelayed or terminated, we could elect, or we could be required, to raise additionalfunds during thatperiod and we may need to raise additional capital in thefuture.Additional capital may not be available at all, or may not be available on termsfavorable to us. Any additional issuance ofequity or equity-linked securities mayresult in substantial dilution to our stockholders. Management is continuallymonitoring and reevaluating its level ofinvestment in all ofits operations and thefinancing sources available to achieve our goals.
201. Again, this risk was repeated in Titan's 2003 Form 10-K filed on March 10, 2004:
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We plan to finance our operations and working capital from a combination ofsources, which include cash generation from our core businesses, our credit facilityand potential cash generated from the disposal of discontinued businesses.Management believes that the combination of our existing cash, amounts availableunder our credit facility and cash flow expected to be generated from our operationswill be sufficient to fund planned investments, the planned redemption of thepreferred stock, the payment of additional consideration on acquisitions, potentialliabilities related to the current government investigation and working capitalrequirements for at least the next twelve months if the proposed merger withLockheed Martin is not consummated. Under the merger agreement, we areprohibited from raising additional capital. Should the merger be delayed orterminated, we could elect, or we could be required, to raise additional fundsduring that period and we may need to raise additional capital in the future.Additional capital may not be available at all, or may not be available on termsfavorable to us. Any additional issuance ofequity or equity-linked securities mayresult in substantial dilution to our stockholders . Management is continuallymonitoring and reevaluating its level ofinvestment in all ofits operations and thefinancing sources available to achieve our goals.
B., Facts Regarding Each of the Individual Defendants Supporta Strong Inference of Scienter
1. Gene Ray
202. Defendant Ray is the Chairman ofthe Board ofDirectors and CEO ofTitan. Ray also
served as President of Titan until May 2002 and was re-elected as President on February 2003,
replacing defendant DeMarco. Ray's primary motivation in the fraud was to ensure that the
Lockheed merger was carried out on favorable terms so as to obtain the huge financial benefits
contained in his golden parachute executive agreement and to convert his considerable Titan
holdings into Lockheed securities on extremely favorable terms.
203. Titan amended Ray ' s executive agreement in the summer of 2003, so as to provide
special merger benefits for Ray at the direct expense of stockholders. Pursuant to these agreements,
Ray would be entitled to a lump sum payment in an amount equal to three times the sum of his base
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salary. This was a considerable amount as Ray's base salary in 2003 was $807,501. Titan's Form
DEF 14A, filed on July 26, 2004, at 21. The agreement also provided Ray with three times his
highest annual bonus, plus a prorated bonus for the year of the merger. Lockheed's Form S-4, filed
on October 15, 2003, at 50-52. To ensure that the bonus provision would be particularly enriching,
on September 15, 2003, the Board ofDirectors increased the target bonuses for Ray by an additional
$120,000. Id. at 53. With this increase, Ray's 2003 bonus was $760,000. Titan's Form DEF 14A,
filed on July 26, 2004, at 21.
204. Ray' s executive agreements also ensured that he would maintain his family's
prescription, dental, disability, employee life, group life, accidental death and travel accident
insurance plans and programs benefits for three years after the end of his continuation coverage
period (typically 18 months) under the Consolidated Omnibus Budget Reconciliation Act
("COBRA"). Lockheed's Form S-4, filed on October 15, 2003, at 50. With regards to medical, the
agreement specifically ensured that Ray and his wife would receive medical benefits for life - a
benefit worth more than a quarter million dollars. Id. Ray also received outplacement services
worth as much as $100,000, and was deemed to be "vested" for all purposes under Titan's
supplemental retirement plan and Titan's 401-K plan. Id. Ray was also provided with an office and
secretary for a period of five years after his employment terminated-a benefit estimated to be worth
$800,000. Id. Finally, under the terms of the executive agreement Ray's executive stock options
became immediately vested and exercisable at the time ofthe merger. As if these benefits were not
enough, Titan guaranteed a tax "gross up payment" so as to ensure that Ray would retain an amount
equal to the excise tax imposed upon the executive. Id. Lockheed estimated that these benefits were
worth $5,466,000 for Ray not including the required tax gross up payment. Ray's executive
agreement also included an unusual additional provision authorizing Ray to award a total of
$1,500,000 in severance payments to employees of Titan at Ray's discretion.
205. Ray was also motivated to carry out the fraud due to the huge benefit he would obtain
by converting his stock holdings into Lockheed securities (or cash) at a massive premium. As of
I July 18, 2004, Ray owned or could acquire within 60 days through option exercise, 1,219,446 shares
I of Titan stock, On July 23, 2003, the day before the Class Period started, Titan closed at $11.26. As
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a result, if Ray had succeeded in carrying out the merger at $22 per share, he would have stood to
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gain $10.74 per share or a total of $13,096,850 in stock appreciation as a result of the fraud. This
provided significant motive for Ray to commit the fraud.
206. Defendant Ray has effectively admitted that he must have had actual knowledge of
the improper transactions and accounting in question in this case. From the August 12, 2002 Form
10-Q going forward, Ray signed a certification of Titan's financial disclosures stating that the
financial statements fairly represented the financial condition and results ofoperations for Titan and
that Ray had
[d]esigned such disclosure controls and procedures, or caused such disclosurecontrols and procedures to be designed under our supervision, to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in whichthis report is being prepared [and]
[e]valuated the effectiveness of the disclosure controls and procedures and presentedin this report our conclusions about the effectiveness of the disclosure controls andprocedures, as of the end of the period covered by this report based on suchevaluation....
207. Had Ray carried out the tasks that he claimed to he would have "ensured" that
"material information" such as the bribery and uncollectible receivables would have been known to
Ray. As such, either Ray's certification is false, or Ray's statement constitutes an admission as to
knowledge of the bribery and uncollectible receivables alleged herein.
208. Further, as noted by numerous articles, Ray was intimately involved with the
transactions at issue in this Complaint. For example, a February 17, 1999 Titan press release stated
that:
The Titan Corporation (NYSE:TTN) announced today that President and ChiefExecutive Officer , Gene Ray, accompanied by a delegation offive people, metrecently with the Head of State of Benin , Mathieu Kerekou, regarding theinstallation and integration of a state of the art communications system in Benin,Africa and the in-country production of personal computers, work stations, andlaptops for distribution throughout Africa.
The President and Chief Executive Officer of The Titan Corporation, Dr.Gene Ray said, "It was an honor to meet with His Excellency, Mathieu Kerekou, theHead of State of Benin, where we both reaffirmed our personal commitment to thisproject. At the meeting with the Head of State, I informed His Excellency that the
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1 hub site has been completed in Benin , and that the initial satellite equipment isnow arriving in his country."
2209. Similarly , a May 3 , 2000 Titan press release entitled , "Titan Launches GSM Mobile
3Network in Benin" states that:
4President Matthew Kerekou, the Head of State, placed the first official phone call
5 over the Libercom network. Ambassador Robert Felder , the U.S. Ambassador toBenin , Mr. Barthelemy Agnan , Director General of the OPT, and numerous other
6 dignitaries , joined Titan Chairman , President and CEO Gene Ray and TitanWireless President and CEO Herb Bradley for the launch ceremony in Cotonou
7 which was broadcast on television and covered by the national media.
8 210. Likewise , a May 4, 2000 San Diego Metropolitan article included the following
9 passage purporting to quote Ray:
10 "The launching of GSM service in Benin was an important milestone forTitan," says Ray. "First , it demonstrates our ability to integrate large, complex
11 networks . Second , through our Benin project ... we havegained valuable experienceas a telecommunications service provider. We look forward to expanding our service
12 businesses to neighboring countries as we continue to build our presence on theAfrican continent."
13211. As such, it is clear that Ray was intimately involved in the negotiations and contract
14fulfillment for the Beninese project such that he would have been intimately involved with any
15bribery and collectability issues involved with this work.
16212. As noted above, Titan/Titan Wireless received a "partial exoneration" of customs
17duties from the Beninese as a result of Karicom ' s efforts . All the members of the Titan
18Wireless/Titan Africa Board, including Ray, were completely aware ofthe "status ofexoneration" or
19lack thereof, on the Beninese project and were completely aware of the role that Karicom fulfilled in
20Benin for Titan/Titan Wireless . As a member of the Titan Africa Board, Ray received accurate
21information regarding Benin from his subordinates.
22213. Ray was not only directly informed , but was also informed about these issues through
23his close relationship with DeMarco . Ray was immensely impressed with DeMarco going back to
24when DeMarco had been an auditor of Titan with Andersen . Ray once introduced DeMarco
25expressing admiration regarding DeMarco ' s knowledge regarding business, accounting and finance
26matters . Ray greatly appreciated DeMarco's role as the architect for taking Titan from being an
27approximately $ 140 million a year company to a $1+ billion a year company. On a number of
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occasions over the years Ray and DeMarco would go over papers together for the duration of the
airplane flights they were on. Indeed, DeMarco represented to Head that DeMarco would tell Ray of
DeMarco's plans to have Karicom bill Titan for phony services.
2. Mark Sopp
214. Defendant Sopp has been Titan's Senior Vice President, CFO and Treasurer since
April 2001. Sopp's primary motivation in the fraud was to carry out the Lockheed merger on
favorable terms so as to obtain the huge, financial benefits contained in his golden parachute
executive agreement and to convert his considerable Titan holdings into Lockheed securities on
extremely favorable terms.
215. During September 2003, Sopp made sure that his interests were placed above
stockholders by negotiating an executive agreement so as to provide him special benefits in the
merger. Pursuant to these agreements, Sopp would be entitled to obtain a lump sum payment in an
amount equal to three times the sum of his base salary. This was a considerable amount as Sopp's
salary for 2003 was $324,508. Titan's Form DEF 14A, filed on July 26, 2004 at 21. The agreement
also provided Sopp with three times his highest annual bonus plus a prorated bonus for the year of
the merger. To ensure that the bonus provision would be particularly enriching, on September 15,
2003, the Board ofDirectors increased the target bonuses for Sopp by an additional $48,750, raising
Sopp's 2003 bonus to $293,000. Lockheed's Form S-4, filed on October 15, 2003, at 53. The
executive agreement ensured that Sopp would maintain his family's medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident insurance plans and
programs benefits for three years after the end of COBRA coverage (typically 18 months) and
provided Sopp with outplacement services worth as much as $100,000. Sopp's agreement also
provided that he would be deemed to have vested for all purposes under Titan's supplemental
retirement plan and Titan's 401-K plan. Finally, under the terms ofthe executive agreement Sopp's
executive stock options would immediately vest and become exercisable. All of these benefits to
Sopp were effectively tax-free as Titan guaranteed a tax "gross up payment" so as to ensure that
Sopp would retain an amount equal to the excise tax imposed upon Sapp. Lockheed estimated that
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1 these benefits were worth $1,989,000 for Sopp and noted that this estimate did "not include any tax
2 gross up payment." Lockheed's Form S-4, filed on October 15, 2003, at 50.
3 216. Sopp was also motivated to carry out the fraud due to the huge benefit he would
4 obtain by converting his stock holdings into Lockheed securities at a massive premium. As of July
5 18, 2004, Sopp owned, or could acquire within 60 days through option exercise, 192,731 shares of
6 Titan stock. On July 23, 2003, the day before the start of the Class Period, Titan closed at $11.26. If
7 Sopp had succeeded in carrying out the merger at $22 per share ($10.74 higher than the July 23,
8 2003 close), Sopp would have gained $2,069,930 in stock appreciation bythe fraud. This provided a
9 significant motive for Sopp to commit the fraud.
10 3. Deanna Hom Lund (Petersen)
11 217. Defendant Lund worked at Arthur Andersen's San Diego office before joining Titan
12 in 1993 as corporate manager of operational analysis. Lund and DeMarco had a long history
13 together. Defendant DeMarco worked as a senior audit manager for Arthur Andersen, serving the
14 Titan account out of Arthur Andersen's San Diego office from approximately 1987 until January 15,
15 1997. Similarly, Lund worked at Arthur Andersen's San Diego office before joining Titan in 1993
16 as corporate manager of operational analysis. When DeMarco was appointed as CFO, Titan also
17 announced in the same press release, that it had promoted Lund to the position of Corporate
18 Controller. DeMarco had personally hired her on as Controller, and while there, Lund was "in on a
19 lot of things." Indeed, when DeMarco was terminated by, Titan in February 2003, Lund soon
20 followed DeMarco to his new place of employment at Wireless Facilities. As such, it is clear that
21 Lund and DeMarco worked closely together for many years and Lund would have been privy to
22 DeMarco's information about the financial transactions at issue in this Complaint.
23 218. Lund's primary motivation in the fraud was to carry out the Lockheed merger on
24 favorable terms so as to obtain the financial benefits contained in her golden parachute executive
25 agreement. To protect their personal interests in the merger Lund and other corporate executives
26 obtained an agreement granting them substantial retention, severance, and/or other payments in the
27 merger. Lockheed's Form S-4, filed on October 15, 2003, at 52. The total estimated cost of the
28 payments payable to these nine Board-elected corporate vice presidents, including Lund, was
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$1,716,000. Under the golden parachute provisions, Lund and other top executives would also have
been provided with financial counseling and tax preparation services valued at $624,000. Further, on
August 20, 2003, Titan's Board ofDirectors adopted a resolution that, like the agreements with Ray
and Sopp, contained a provision that would accelerate and fully vest Lund's stock options upon the
merger. The impact of this maneuver was substantial and Lockheed admitted that options to
purchase in the aggregate 1,867,629 shares of Titan common stock held bythe executive officers and
directors of Titan would be accelerated and become fully vested and exercisable upon completion of
the merger. This provided significant motive for Lund to commit the fraud. Notably, despite her
access to insider information regarding Titan, Lund also sold 26,006 shares ofstock on July 31, 2003
-during the Class Period - obtaining proceeds of $398,932.
4. Eric DeMarco
219. Defendant DeMarco is a former Titan President and COO. On February 12, 2003,
Ray (on behalf of Titan) and DeMarco signed a "mutual termination of employment" agreement in
which DeMarco would obtain benefits of $1.515 million in cash and other benefits and Ray would
take over as President of Titan. DeMarco now works for Wireless Facilities.
220. As noted above, Titan/Titan Wireless received a "partial exoneration" of customs
duties from the Beninese as a result of Karicom's effort. All the members of the Titan
Wireless/Titan Africa Board - which included DeMarco - were aware ofthe "status ofexoneration,"
or lack thereof, on the Beninese project and were aware of the role that Karicom fulfilled in Benin
for Titan/Titan Wireless. In particular, DeMarco received PowerPoint presentations that detailed the
monthly performance of operations in Benin for a given quarter, including actual revenues compared
to projected revenues for the period, in addition to revenues projected for future periods. DeMarco
also received accurate data as a Titan Africa Board member where this financial data was presented
at quarterly meetings. In addition, Director of Operations Shawn Lechien, who reported to
DeMarco, also received this data. DeMarco and Lechien had both traveled to Paris frequently to
help set up the Titan Secure venture in Saudi Arabia.
221. That DeMarco had actual knowledge ofthe fraud is also demonstrated by a number of
`confident ial witnesses . DeMarco would have had to have been aware of the problematic activities
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going on in Benin because of DeMarco's need to routinely transfer funds to pay for the $7.5-$8
million in unaccountable Benin expenditures. Head kept writing checks to Amadou and DeMarco
kept wiring more and more money. Indeed, DeMarco structured all of Titan's business ventures,
received the Benin P&L, traveled to Africa frequently, and was the source of the percentage of
completion accounting techniques learned from "the Andersen school of accounting" that allowed
Titan to either overstate or prematurely state revenues at the Company.
222, Prior to defendant Sopp taking over as CFO (an appointment which was made in
April 2001), DeMarco reviewed all the performance data for the Beninese venture that Head
I submitted and DeMarco then made the decisions as to what would be reported by Titan Corporation
I regarding the Beninese venture.
223. DeMarco knew that the Titan Wireless division was not successfully earning revenues
as he was briefed regarding Titan Wireless' performance by Titan Wireless CEO O'Rourke. This
information was communicated to DeMarco via PowerPoint presentations composed by Abba, a
former Program Manager, which clearly showed that the Titan Wireless projects, including the
Benin project, were not performing up to forecasted goals. DeMarco knew about these large
shortfalls in the revenues that had been projected for Titan Wireless and what was actually earned
because Titan Wireless was reliant on Titan to receive injections of funding to sustain its operations
because it was not organically generating sufficient revenues on its own.
224. DeMarco knew of the Benin deals and made false statements regarding the
I collectability of Benin receivables going all the way back to 2002. For example, in a July 11, 2002
I conference call with analysts, DeMarco stated in reaction to a question about the viability ofthe $50
million receivable for the Benin project, "the expectation from a cash standpoint is that contract is
with the government entity ... we are being paid and we expect to go after and collect that ...."
Before the summer of 2002, the Beninese owed Titan approximately $50 million but had not paid
anything. By summertime 2002 it was "known for sure" that Titan was not going to get the full $50
million. As a result, there were negotiations to reduce the amount owed by halfto only $25 million.
225. The facts above provide a strong inference that DeMarco knew, or was deliberately
I reckless in not knowing, about the bribery and uncollectable receivables associated with the Benin
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transactions. Indeed, any doubt is eliminated by DeMarco's attempt to cover up the bribes when
they were made. In particular, in carrying out the payments to Karicom, DeMarco told Head to
direct Karicom to send invoices to Titan Africa for work-related activity that Karicom did not
actually perform (such as for "site surveying" and other "technical work"). Under DeMarco's plan
Titan would receive invoices for the fictitious work and would pay Karicom based on these fictitious
bills. By directing Karicom to bill Titan for work that was not actually performed it created a
problem for Titan because the disbursements were "auditable" but the work could not be verified.
These fraudulent efforts demonstrate DeMarco's knowledge that these bribes were improper.
226. DeMarco also attempted to cover up his misdeeds after the fact. As noted above,
Head was interviewed by Lockheed lawyers, and later the SEC, and the Assistant Attorney General.
An hour before Head was scheduled to have a conference call with Lockheed ' s attorneys, DeMarco
called Head and told him to tell the lawyers "as little as possible ." DeMarco told Head that if Head
I answered all the questions from the lawyers , "they 'll go down a path we don ' t want to go." Head
told DeMarco that he would answer whatever questions the lawyers asked him.
C. Admission of Scienter by Titan Director
227. During 2002, Titan appointed Peter Cohen to the Board ofDirectors. Mr. Cohen was
interviewed by The San Diego Union-Tribune for an article that appeared on July 18, 2004. This
article provided significant insights into the Company's knowledge of the problems in 2002 that
Titan had been experiencing since 2002 and Titan's current crisis. In particular, the story stated:
Even Cohen acknowledged that Titan has a credibility issue.
But what investors and analysts need to understand, Cohen said, is that "thereality ofthis company is much better today than it was twoyears ago, whenpeoplethought everything was fine."
At the time, Cohen saw a fundamental problem in Titan's efforts to develop acommercial wireless business in developing countries, which was part of thecompany's broader strategy to enter commercial markets as Pentagon spendingdeclined in the 1990s.
Cohen said that when he agreed to join Titan 's board in early 2002, hemade it clear that he viewed Titan 's foreign wireless business as "nothing otherthan a write-off waiting to come."
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While Titan wrote off most of that business in late 2002 for almost $225million, Cohen said it was an uphill battle because some board members still viewedwireless service in developing nations as a good business.
"Very subsequent to that," Cohen added, "a senior officer of the companyleft, and he left in part because some of us said he's never going to succeed GeneRay as chief executive."
Cohen declined to be more specific. But Eric DeMarco's resignation asTitan's chief operating officer in early 2003 surprised Wall Street and triggered asharp sell-off in Titan shares.
Events this year have proved to be a dash of cold water for many, addedCohen, who doesn't fault Ray for the trouble.
But closer financial oversight was clearly warranted, and Cohen said heintends to fill that role, along with fellow directors Robert Hanisee and Joseph R.Wright Jr.
"Gene is a Ph.D. scientist, but he's not a doctor of finance," Cohen said.
Such statements demonstrate that Titan knew about the collectability problems in Benin back in
2002 but refused to properly write-down these receivables at the time. These statements also
I demonstrate that "closer financial oversight was clearly warranted" for transactions that were
occurring at this time.
VII. CLASS ACTION ALLEGATIONS
228. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalfof all persons who purchased Titan common stock on the open market
during the Class Period (the "Class"). Excluded from the Class are defendants.
229. The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court. Titan had more than 81.5 million shares of stock outstanding, owned by
hundreds if not thousands of persons.
230. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
(a) Whether the 1934 Act was violated by defendants;
(b) Whether defendants omitted and/or misrepresented material facts;
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(c) Whether defendants' statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d) Whether defendants knew or recklessly disregarded that their statements were
false and misleading;
(e) Whether the price of Titan stock was artificially inflated; and
(f) The extent of damage sustained by Class members and the appropriate
measure of damages.
231. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class
sustained damages from defendants' wrongful conduct.
232. Plaintiffs will adequately protect the interests ofthe Class and have retained counsel
who are experienced in class action securities litigation. Plaintiffs have no interests which conflict
with those of the Class. A class action is superior to other available methods for the fair and
efficient adjudication of this controversy.
COUNT I
For Violation of Section 10(b) of the 1934 Actand Rule lOb-5 Against All Defendants
233. Plaintiffs incorporate ¶!(1-232 by reference.
234. During the Class Period, defendants disseminated or approved the false statements
specified above, which they knew or recklessly disregarded were misleading in that they contained
misrepresentations and failed to disclose material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading.
235. Defendants violated § 10(b) of the 1934 Act and Rule I Ob-5 in that they:
(a) Employed devices, schemes, and artifices to defraud;
(b) Made untrue statements of material facts or omitted to state material facts
necessary in order to make the statements made, in light ofthe circumstances under which they were
made, not misleading; or
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(c) Engaged in acts, practices, and a course ofbusiness that operated as a fraud or
deceit upon plaintiffs and others similarly situated in connection with their purchases of Titan
common stock during the Class Period.
236. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid-artificially inflated prices for Titan stock. Plaintiffs and the Class would not
have purchased Titan stock at the prices they paid, or at all, if they had been aware that the market
prices had been artificially and falsely inflated by defendants' misleading statements.
237. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and
the other members of the Class suffered damages in connection with their purchases of Titan stock
during the Class Period.
COUNT II
For Violation of Section 20(a) of the 1934 ActAgainst All Defendants
238. Plaintiffs incorporate S11-237 by reference.
239. The Individual Defendants acted as controlling persons of Titan within the meaning
of §20(a) ofthe 1934 Act. By reason of their positions with Titan and ownership of Titan stock, the
Individual Defendants had the power and authority to cause Titan to engage in the wrongful conduct
complained ofherein. Titan controlled each of the Individual Defendants and all of its employees.
By reason of such conduct, the Individual Defendants and Titan are liable pursuant to §20(a) ofthe
1934 Act.
VIII. VIII. PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on behalf of themselves and the Class, pray for judgment as
follows:
A. Declaring this action to be a class action properly maintained pursuant to Rule 23 of
the Federal Rules of Civil Procedure;
B, Awarding plaintiffs and other members of the Class damages together with interest
thereon;
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L^NLS Document 17 Filed 09/2004 Page 84 of
C. Awarding plaintiffs and other members of the Class costs and expenses of this
litigation, including reasonable attorneys' fees, accountants' fees and experts' fees and other costs
and disbursements; and
D. Awarding plaintiffs and other members of the Class such other and further relief as
may be just and proper under the circumstances.
IX. JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: September 17, 2004 LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
REED R. KATHREINSTANLEY S. MALLISONJAMES W. OLIVER
A' REED R. KATHREIN
100 Pine Street , Suite 2600San Francisco , CA 94111Telephone : 415/288-4545415/288-4534 (fax)
LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
BRIAN 0. O'MARA401 B Street , Suite 1700San Diego , CA 92101Telephone : 619/231-1058619/231 -7423 (fax)
ROBBINS UMEDA & FINK, LLPBRIAN J. ROBBINSMARC M. UMEDAJEFFREY P. FINK1010 Second Avenue, Suite 2360San Diego , CA 92101Telephone : 619/525-3990619/525-3991 (fax)
Co-Lead Counsel for Plaintiffs
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T:1CasesSF\Titan Corp Sec\CPT000I3180 dnu.doc
MURRAY FRANK & SAILER LLPBRIAN P. MURRAYERIC J. BELFI275 Madison Avenue, Suite 801New York, NY 10016Telephone: 212/682-1818212/682-1892 (fax) -
Attorneys for Plaintiffs
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DECLARATION OF SERVICE BY MAIL AND UPS
1, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen ofthe United States
and employed in the City and County of San Francisco, over the age of 18 years, and not a party to
or interest in the within action; that declarant's business address is 100 Pine Street, Suite 2600, San
Francisco, California 94111.
2. That on September 17, 2004, declarant will cause to be served the CONSOLIDATED
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS by depositing a true
copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with
postage thereon fully prepaid and addressed to the parties listed on the attached Service List.
Declarant will also cause a true copy to be served by UPS overnight service upon counsel for
defendants.
3. That there is a regular communication by mail between the place of mailing and the
places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 16th
day of September, 2004, at San Francisco, California.
MEDEIROS
Case 3:04-cv-00676-LWLS
TITAN CORP. SEC (LEAD)
Service List - 9/17/2004 (04-0176)
Fjage 1 of I
Counsel For Defendant(s)
William E. GrauerKoji F. Fukumura
Cooley Godward LLP4401 Eastgate MallSan Diego, CA 92121858/550-6000858/550-6420 (Fax)
Counsel For Plaintiff(s)
Brian 0. O'Mara
Lerach Coughlin Stoia Geller Rudman &Robbins LLP
401 B Street , Suite 1700San Diego , CA 92101-4297
619/231-1058619/231-7423 (Fax)
Brian P. MurrayEric J. Belfi
Murray, Frank & Sailer LLP275 Madison Avenue , Suite 801
New York, NY 10016212/682-1818212/682-1892(Fax)
Document 17 Filed 09/2004 Page 87 of
Reed R. KathreinStanley S. MallisonJames W. Oliver
Lerach Coughlin Stola Geller Rudman &Robbins LLP
100 Pine Street, Suite 2600San Francisco, CA 94111-5238415/288-4545415/288-4534(Fax)
Brian J . RobbinsMarc M. UmedaJeffrey P. Fink
Robbins Umeda & Fink, LLP1010 Second Avenue , Suite 2360San Diego, CA 92101
619/525-3990619/525-3991 (Fax)